Investigating the Natural Monopoly Effect in Brand Purchasing: Do Big Brands Really Appeal More to Lighter Category Buyers?
23 Pages Posted: 3 Nov 2017
Date Written: November 2, 2017
The Natural Monopoly [NM] effect is that big brands appeal to somewhat ‘lighter’ or less frequent buyers of the product category, whereas small brands appeal to heavier category buyers. The NM effect has an important managerial implication. It implies that for a brand to grow from small to big, it must heighten its appeal particularly to lighter buyers of the product category. NM is potentially informative as to customer base analysis, providing empirical norms for a brand’s light and heavy category buyers. Moreover, NM could help managers understand loyalty metrics, because it pertains to systematic variation in the category purchase rate, which is an input into common loyalty measures such as SCR (share of category requirements). However, little is known as to the extent to which NM occurs and the extent to which it covaries with variables such as brand size, price and type (store brand, manufacturer brand). This study examines the NM effect in packaged goods markets using data on 24 FMCG categories in Holland. The analysis compares observed category purchase rates among buyers of each brand with theoretical ‘norms’ derived from the well-known NBD-Dirichlet model. It also examines the simple correlation between brand size and category purchase rate as a direct test of the NM effect. Analysis confirms the NM effect is quite pervasive, being present in most categories. The average correlation between brand size (i.e., penetration) and category purchase frequency is -0.36. This figure shows that buyers of large brands do buy the category less often on average. Second, the analysis finds the NBD-Dirichlet model produces accurate predictions of the average rate at which buyers of each brand buy the product category. However, there is nearly twice as much variation in the category purchase rates than predicted by the NBD-Dirichlet. As well as finding that bigger brands tend to have lighter category buyers, the study also finds lower-priced brands and store brands appeal more to heavy category buyers. The study also explains how bigger brands manage to be bought more frequently by their buyers, whilst simultaneously appealing to lighter category buyers. The answer is they obtain a higher share of requirements among light, medium and heavy category buyers: particularly heavy buyers. These findings are useful general knowledge for brand marketers and retailers. The NM effect will be subject to further research to test the extent that it is an empirical generalization.
Keywords: Natural Monopoly, Dirichlet Model, Loyalty Metrics, Brand Metrics
JEL Classification: M31
Suggested Citation: Suggested Citation