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5
BRAND-SWITCHING ANALYSIS
The content of this supplementary note links with Chapter 4 (page 88)
Consider the market share development of brands A, B and C shown in Figure Web 5.1, below.
Brand C
Brand A
Brand B
Time
The stability of brand A's market share can be interpreted in two very different ways:
• A fixed number of consumers buy the same quantity of brand A at regular intervals.
• The number of consumers dropping brand A is equal to the number of consumers adopting
brand A; entry rate then compensates exit rate exactly.
On the basis of aggregate market data, it is not possible to decide which is the true state.
Similarly, one could give the following explanations for brand B’s growth:
• Brand B has a fixed number of loyal buyers to whom new buyers are added at a regular
pace,
• Entry rate is higher than exit rate,
• The number of brand B's buyers remains unchanged, but some of them are purchasing an
increased quantity per buying occasion.
Here again, the available information does not permit us to discriminate between these possible
explanations.
To keep the analysis simple, let us limit ourselves to a market composed of two competing
brands. As shown in Figure Web 5.2 each particular purchasing act, viewed in a dynamic
perspective, can be described in terms of three origins and three destinations.
Attraction
Purchase of Purchase of
Loyalty Brand A Brand B
Switch
Switch
Attraction
Non-purchase
For each brand, we can thus define a loyalty rate and an attraction rate as follows:
• The loyalty rate is the percentage of buyers who, having purchased brand A in the previous
period (t-1), continue to buy brand A in the current period (t).
• The attraction rate is the percentage of buyers who, having purchased a competing brand
in period t-1, purchase brand A in period t.
the basis of panel data. To illustrate, the transition probabilities observed in the Belgian market
among six makes of heavy trucks are presented in Table Web 5.1.
These transition probabilities allow the market analyst to explain market share movements over
time, to describe the underlying competitive dynamics and to formulate predictions on market
developments assuming that the observed transition probabilities will remain unchanged within
a reasonable planning horizon.
If α denotes loyalty rate and β attraction rate, brand A's market share in future period t+1 will be,
Brand A’s long-run or equilibrium market share, MS (e), can be calculated from the following
expression,
Attraction rate β
MS(e) = =
(1 − loyalty rate) + (attraction rate) (1 − α ) + β
Note that equilibrium market share is independent of the initial market share. It describes the
brand's trajectory, assuming constant transition probabilities. This type of dynamic analysis is
particularly useful at the launching stage of a new product.