Brandaq: The End of Marketing

My introduction to brand loyalty came at the age of 8, as a 4-foot expat in a humid little cantina off a cluttered side street in the Philippine capital of Manila. My best friend, Alex, a classmate at the International School and a Spaniard, was a foot soldier in the cola wars. His father, a PepsiCo executive stationed at this far-from-the-front outpost in the cola wars, had taken us one Sunday to church and then to lunch, where there ensued a minor battle in the epic military history of Coke vs. Pepsi.

Despite the crusty plastic Coca-Cola sign hanging over the doorjamb and the red-and-white logo emblazoned on the crusty window and the Coke-branded fountain on the countertop, Alex, with a healthy amount of suspicion, demanded a Pepsi. The waitress nodded and smiled and then returned with a plastic cup.

"Is this Pepsi?" Alex asked defiantly.

The waitress nodded.

I should like to recall for you the look on Alex's face and the waitress's and his father's, but all I truly recall is how he took the plastic cup to his lips, swirled the drink quickly in his mouth, and then leaned over to his side and spit the cola on to the dirty wood-slat floor. "Coke!" he shrieked.

Somewhere a Pepsi brand manager earned his wings. Well, perhaps not. Alex's bias was, after all, more toward an employer than a product. Still, his loyalty ran deeper than his father's, who, as I recall, castigated his son with an earful of Spanish that I was not meant to understand and then proceeded to apologize to the waitress and drink the Coke himself as Alex commenced a seven-minute hunger strike.

I recall thinking to myself, Hey, man, it's only a soft drink.

Years later, as someone whose job it is to think about such things, I recalled that story often during discussions of lifetime value and the good and bad of loyalty marketing. Using Alex as an example, I calculated that he would likely drink two Pepsis a day for the rest of his life. Based on certain assumptions for price, inflation, life expectancy, and the like, that came to a lifetime value of $125,804. In present dollars, based on some conservative rate-of-return assumptions, that equates to $4,087.

And so, I wondered, whether it really is only a soft drink, and if Alex was worth $125,804 to Pepsi, then what was he worth to Coke? Better yet, what am I worth to Coke (even at this later stage in life)? I, unlike Alex, am without a personal stake in the cola wars and, therefore, am free to negotiate the terms of my allegiance with either side. How much, then, of my lifetime value is Coke willing to share with me to guarantee my allegiance?

My calculations run like this: If I enter into a contract with Coca-Cola to consume two Cokes a day for the next 46 years (based on my life expectancy per the National Center for Health Statistics), I will spend $18,332.36 on 402,960 fluid ounces of carbonated sugar water and caffeine over that time. Discounting that back at Coke's 12.33% cost of capital, we get $1,922.83 in today's dollars.

Okay, you say, but then wouldn't Coke just be paying you for product that you might have bought anyway? Sure. The key for Coke is to lure away Pepsi drinkers. But that means paying for the loyalty of Pepsi drinkers and people who would have been loyal anyway. The way I see it, that is really no different than mass-market advertising directed at Coke loyalists.

The real issue is a matter of game theory: What happens when Pepsi enters into the fray, offering its own loyalty contracts? Well, what happens is, we see a bidding war for consumers played out in creative financing rather than in advertising budgets. That is good for consumers' wallets, bad for producers' margins. But on the flip side, we could do away with Britney Spears television campaigns, look-under-the-cap games, RocketCash, stocking incentives, and placement incentives, among others. The driving force behind consumption -- for those willing to sell their loyalty -- would simply be the prices of loyalty contracts.

But for the sake of argument, let's assume that, had I no incentive either way, I would have split my consumption equally between Coke and Pepsi. Coke then would only be buying the other half of my loyalty. By my calculation, Coke should be willing to cut me a check for $961.42.

Coke's investment in me can be looked at as simply a transfer of resources: How much less on advertising will Coke now spend because it has me in the bag? For reference, Coke spent about $2 billion on advertising in 2001 and sold 17.8 billion unit cases (24 units per case), which comes to half a cent per unit. That's a start.

It's also helpful to know that Coke's strategy for global dominance no longer relies on such tired metrics as unit sales and market penetration. No, Coke now views market share through an entirely different lens: percentage of your daily fluid intake. Really. The average human being requires 72 ounces of liquid per day. Coke, if you can believe it, now represents 2 of those ounces, globally.