Swimming with the sharks? Understanding the competitive structure
of primary-demand level product-markets.
Introduction
The issue of product-market definition is complex, but demands consideration by
marketing strategists who need to look further than a simple category definition of
closely substitutable competitors if they are to understand the full extent of the
competition they face. As Shocker (2005 p.107) points out, “competition is a matter
of degree rather than a simple dichotomy”. Consumers choose not just between
competing brands in the same product category, but also from other categories that
might meet the same generic need. As Lehmann and Winer’s conceptualisation
(2005) defines it, this demand-oriented competition occurs at four different levels:
product form, product category, generic and budget.
At the product-form level, competition is between brands serving the same customers
with closely substitutable products, offering largely similar attributes, as it might be
two similar brands of instant coffee granules, or of laundry detergent. At the product
category level, the competitive set is extended to include not just close substitutes, but
all product forms in a wider market. For example, while Walkers crisps may compete
closely with Seabrook crisps, both brands may also be competing with premium
offerings such as Kettle Chips. The biggest suppliers or retailers in the channel often
define this broader category definition, in consultation with their research providers.
At the generic level (primary demand), products compete with anything that meets the
same broad need so for example, potato crisps are part of a wider salty snacks
category that may include corn and potato-starch based chips as well as nuts and
varieties of pork scratching. Lastly, Lehmann and Winer define budget competition as
anything that may have a stronger call on limited discretionary income, although they
point out that the competitive effects of this are hard to determine.
Market structure at both the product form and the category level can be estimated on
the basis of brand choice (selective demand). Shocker (2005) outlines three common
approaches. The first, derived from cross-elasticity calculations, considers the impact
of one brand’s marketing activities on sales of others. When a substantial impact is
identified the conclusion is that the affected brands are competing. One difficulty in
this approach is that it can only be applied to existing brands, and so it is of limited
use in planning for new products. Furthermore, marketing impacts on smaller brands
such as those in limited distribution are not easily tracked.
A second approach, substitutability-in-use (substitutability)is more useful here, as it
highlights a rationale for the existence of the competition, usually through qualitative
research. For managers this offers the chance to assess the proposed benefits of new
products, and to explore market segmentation, where products may need to meet more
varied consumer needs. This type of research leads to a complex categorisation of
markets and submarkets based on benefits sought (Shocker, Stewart and Zahorik,
1990a) to which, in practice, it may be impossible to respond. Results from such a
deterministic approach are also likely to be misinterpreted because of the gulf
between consumer attitude and consumer behaviour (Dall’Olmo-Riley, Ehrenberg,
Castleberry, Barwise & Barnard, 1997). The third alternative is the analysis of brand
switching from panel or other aggregated choice data (Colombo and Morrison, 1989;
Erdem, 1996). This approach describes existing competitive intensity through analysis
of switching probabilities and by extension through duplication of purchase analysis
(Ehrenberg & Goodhardt, 1970), the technique we employ here.
At the selective demand level, the marketing strategy literature has long championed
the benefits of loyalty, and the sustainable competitive advantage of brand equity and
retention (Aaker, 2002; Keller, 1993; Keller & Lehmann, 2006; Reichheld, 2003).
However, as Reinartz and Kumar (2002) and East, Hammond and Gendall (2006)
both show, this view is not supported by the empirical evidence. Instead, the repeat
buying of competing brands falls into regular and predictable patterns and can be
summarised in a single model, the NBD-Dirichlet (Goodhardt, Ehrenberg and
Chatfield, 1984). The main brand metrics are all described in this model; how many
people buy each brand, how often they do so, and which other brands they buy. The
fundamental pattern observed is that all brand performance measures vary together
according to brand size. This is reflected in loyalty measures such as repeat purchase
and brand switching that are dependent upon market share rather than on any
particular brand or customer attribute. Big brands tend to score higher and small
brands lower on these metrics (Ehrenberg, 1988; Ehrenberg, Uncles and Goodhardt,
2004). The model and the empirical generalisations it describes therefore lead to
simple performance benchmarks and norms that capture market structure accurately
between competing brands.
The aim of this research is to extend these empirical generalisations to the level of
primary demand, in order to describe and benchmark patterns of buying behaviour
between, rather than within, categories. Findings will be of use to brand marketers
who are seeking expansion opportunities in new, but related categories (Bang &
Joshi, 2008), those who wish to identify or explain current threats at a higher
competitive level (Levitt,1960; Lehmann & Winer, 2005), and to marketers at trade
associations who seek to understand the relationship between, and the relative
importance of, the connected categories they support. In this exploratory study we
report the generic-level consumer purchasing of different categories of seafood using
data from an Australian diary panel. These empirical generalisations in repeat buying
will next be described, followed by the objectives, methodology, data and findings.
For competing brands in established markets, in a period such as a month or quarter:
Brand share is defined by the Law of Double Jeopardy. Small brands suffer twice.
Compared with bigger brands they have fewer buyers who buy that brand slightly less
often. Market shares and penetrations are closely correlated, but vary considerably.
This implies that penetration accounts for brand size far more than loyalty, which is
quite similar between brands.
100% brand loyal customers do exist but they are light buyers. A large proportion of
any brand’s buyers only buy the category once in a period, and therefore cannot
switch by definition.
Your buyers are the buyers of other brands who occasionally buy you. Loyalty is
polygamous; most consumers select from a limited repertoire of familiar brands.
Duplication is in line with brand penetration. The proportion of the buyers of brand x
who also bought brand y in the period is related to the penetration of brand y. This law
is normally expressed as: by|x = Dby . Any deviation indicates a greater or lesser
degree of competition between pairs of brands, and this can indicate market
partitioning, for example between diet and regular colas. The main finding here has
been that brand-level segmentation does not exist: simply a higher than expected level
of duplication between partitioned brands (Kennedy & Ehrenberg, 2001). Buyers of
diet colas usually buy both main brands, but also buy regular colas occasionally.
Objectives
Our focus is on the patterns of consumer purchase between competing categories of
seafood - generic competition. We expect that the established patterns of buying
behaviour commonly seen between existing brands will replicate at the higher
primary-demand level of category buying. In particular we seek to:
 Extend the application of the duplication of purchase law in order to describe
generic level purchasing.
 Describe the intensity and extent of inter-category competition
 Test for evidence of category-level segmentation
Methodology
A small consumer shopping-panel consisting initially of 132 respondents was
recruited from a larger existing online consumer database. Screening questions
stipulated that respondents should at least have bought seafood in the past month, to
identify all but the lightest buyers. A total of 113 respondents completed the survey,
collecting receipts for all purchases from supermarkets, grocery stores, convenience
stores, fishmongers, restaurants, pubs and takeaways over four weeks through
November 2009. Purchases without receipts were also recorded in order to capture
whole-of-customer buying. From this data, all generic seafood purchases could be
extracted by category (eg frozen, fresh etc) and by channel (eg supermarket,
fishmonger, foodservice…). Of the 113 respondents, 7% (n=8) bought no seafood in
the period, while the remainder of the panel bought an average of 4.4 times, just over
once per week. Seafood purchases were identified to establish frequencies, and then
tabulated to observe and describe any patterns of repeat buying at the generic level.
Findings
Our first finding is that the stability seen in buying behaviour at the category level
was repeated at the generic level. Purchasing was split polygamously between
consumer marketing channels, just as it is between competing brands. Table 1 shows
the proportion of the total purchasing in each of the four weeks through the three main
outlet types reported in the survey. Each week, around half the panel bought some
type of seafood from one or more of the channels (average of 58%), most from a
supermarket, although 21% ate seafood in a restaurant and just under10% bought
from a fishmonger.
Although these proportions remained in approximate equilibrium from week to week,
individual consumers had different purchasing propensities, a few repeating each
week, and about half buying only once or twice in four weeks. Evidence of buying
from multiple sources in the same week was also seen (total purchasing across three
channels is greater than 58%). These are typical brand-level buying patterns and were
clearly identified between categories at the generic level.
Table 1. Stability in generic seafood purchases by week.
É of those who bought seafood (n=105)
Anywhere
Supermarket
Restaurant
Fishmonger
%
%
%
%
Week 1
Week 2
Week 3
Week 4
57
58
60
57
38
35
38
36
18
19
22
25
11
11
4
5
Average
58
37
21
8
Table 1 also shows a seasonal fluctuation in buying. In weeks three and four
purchasing through restaurants increased by a few points, with a corresponding
decrease in fishmonger purchasing. The data was collected in the run-up to Christmas,
and this pattern reflects the temporary upward trend in eating out. The between–
category pattern is similar to that seen at the product-form level where price
promotions attract buyers in one period, who then switch to another acceptable brand
at the next purchase. Here the generic need was being met by one channel on one
occasion, but met equally well by another at another time. As with brands, such a
trend is only temporary, although here it indicates a heightened substitutability
between two of the three channels, as supermarket sales remained almost steady.
The competitive intensity of multiple category purchasing seen in Table 1 was next
examined using a duplication of purchase analysis. The level of detail was extended
to incorporate the six largest seafood categories bought in the data, namely Shelf
(largely tinned and jars), Restaurant (restaurants, pubs and takeaways), Delicatessen,
Frozen, Fishmonger and Fridge (chilled portions and ready meals). Penetrations for
each these categories were established, and cross purchasing set out as in Table 2.
From this, a duplication coefficient was calculated according to the DoP law (average
penetration divided by average duplication for the period), and a benchmark
established for each category.
As expected, the average duplications shown in Table 2 declined in line with the
category penetrations, and were also a reasonable fit to the predicted values. It thus
became clear that satisfying the generic need for any seafood between categories
resulted in buying behaviour similar to that seen between competing brands within a
category. Buyers of one category were also buyers of other categories, simply in line
with penetration. For example, 48% of consumers who bought from a fishmonger also
bought from a deli (predicted duplication 46%), while only a quarter also bought from
the freezer (predicted 27%). Comparison with the benchmark also revealed some
partitions in buying.
First, restaurant customers bought seafood from every category, but shopped a little
less than expected everywhere except the fishmonger, where they purchased a little
more. This may indicate a small quality-seeking partition. There is also a convenience
partition. Freezer and fridge buyers purchased more heavily than expected from the
shelf, and shelf buyers purchased less than expected from the fishmonger, but these
are only slight variations around the benchmark, rather than deeply carved
segmentation. The generality of purchasing is across multiple complementary
categories, a finding that has important implications for strategy as we discuss next.
Table 2: Duplication of purchase by seafood category
Pen.
%
60
55
39
23
22
8
Of those buying from:
Éproportion (%) also buying from:
Shelf
Rest'rant
Deli
Freezer F'monger
Fridge
Shelf
Restaurants
Deli
Freezer
Fishmonger
Fridge
58
57
73
52
78
53
55
54
76
67
37
39
42
48
78
28
23
25
24
67
19
31
27
23
22
10
10
16
23
8
-
Avg. Duplication
D x Penetration
64
71
61
65
49
46
34
27
24
26
13
9
Coefficient D = 1.18
Conclusions and further research
The duplication of purchase technique, even from a small diary panel, is a useful
measure of competition at the generic level where data may not be comparable or
easy to find. For example, while retail panel data is in plentiful supply, equivalent
foodservice purchasing is far harder to track. This technique captures whole-ofcustomer purchasing, which can therefore be aggregated for analysis.
We have shown that many of the normal patterns of repeat buying seen within
categories replicate at the wider generic-level of competition, between categories. In
the same way that competing brands are substitutable, so are all categories that meet
the generic need. The duplication of purchase law can thus be extended to primary
level competition, which will be useful in understanding the characteristics of a wider
competitive set. The dynamics of such competition, and exceptions to the law, offer
insight for new product development, brand growth and brand extension strategies.
The marketing response to generic-level competition is different from the category
level. In the latter, brand marketers look inward at near competitors. Keller (1993)
suggests that managers must identify and act upon points of parity and points of
difference to market the best version of the product form. In responding to genericlevel competition though, marketers must look outside in order to promote both
category benefits and the brand offer to build penetration from users of other related
categories. Over four weeks only 8% of this sample bought seafood from the fridge, a
category with closely competing brands. While it is nearly impossible to grow brands
by taking share permanently from category competitors (Graham, 2009) our findings
suggest a better strategy; to build category penetration by attracting new buyers to the
brand from related markets, here perhaps from the fishmonger or the freezer.
Lehmann and Winer (2005) have suggested that at the level of primary demand
customers buy for a wider variety of reasons (eg frozen is more convenient than
fresh). This might suggest that a more pronounced partitioning between categories
would become apparent. We didn’t see this clearly. Seafood however is a narrow
generic. At the level of protein it competes with meat, and perhaps also cheese and
tofu products, so here perhaps a clearer segmentation would emerge. Further research
is now needed at such broader generic levels with more categories and bigger
samples, to explore this idea, and further extend these findings.
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Acknowledgement
The authors would like to thank Simplot Seafood Australia Pty Ltd. for their generous
permission to use the data quoted in this study.