B2B NewsPet industry news5 Rule? Does It Apply To Your Company?

5 Rule? Does It Apply To Your Company?

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In 2021, The B2B Institute, a think tank supported by LinkedIn, published a report featuring several papers authored by researchers with the Ehrenberg-Bass Institute for Marketing Science.

One of the papers was written by Professor John Dawes, the Associate Director (Operations) at Ehrenberg-Bass. The main topic of Professor Dawes’ paper was how advertising works, but he began by describing what he called the 95:5 rule. He wrote:

“It might surprise you to learn that up to 95% of business clients are not in the market for many goods and services at any one time. This is a deceptively simple fact, but it has a profound implication for advertising. It means that advertising mostly hits B2B buyers who aren’t going to buy any time soon.”

The 95:5 rule is based on business buying patterns. Professor Dawes gave this illustration of the rule:  “Corporations change service providers such as their principal bank or law firm around once every five years on average. That means only 20% of business buyers are ‘in the market’ over the course of an entire year; something like 5% in a quarter – or put another way, 95% aren’t in the market [in any given quarter].”

Professor Dawes argued that advertising “works” because it builds and refreshes memory links to a brand in buyers’ minds. These memory links will be activated when buyers do come into the market. Therefore, he writes:

“To grow a brand, you need to advertise to people who aren’t in the market now, so that when they do enter the market your brand is one they are familiar with. And, that they mentally associate your brand with the need or buying situation that brought them into the market. That way, you increase buyers’ purchase propensity. And if you do that across enough buyers, your market share will grow.”

Professor Dawes’ paper should trigger two questions in the mind of a B2B marketer.

  1. Does the 95:5 rule apply to my company/in my market?
  2. Should I follow Professor Dawes’ advice and market to buyers who aren’t “in the market?”

In this article, I’ll discuss some of the major nuances of the 95:5 rule. I’ll address the second question in a future article.

Is the 95:5 Rule Valid and How Does It Actually Work?

The 95:5 rule makes sense on an intuitive level. If, for example, your company has just purchased and installed a new HVAC system for its manufacturing plant, it probably won’t need to replace that system for several years. So, it won’t be in the market for HVAC equipment for quite some time.

The rule is also supported by other research. For example, recent research by NetLine Corporation (the operator of a content syndication platform) found that 30.8% of the B2B professionals who access content via the NetLine platform expect to make a purchase within 12 months, 15.2% expect to buy within six months, and 7.6% expect to make a buying decision within three months.

It’s important to recognize that the percentage values in the 95:5 rule were never intended to be interpreted literally or viewed as universal. In his paper, Professor Dawes wrote, “The 95% figure is not meant to be a precise rule. We’re using it as a heuristic to get the idea across that the vast majority of businesses, for a large proportion of products, are not in the market in particular time periods.”

In fact, the 95:5 rule can’t be universal or precise for several reasons. Here are three of the more important reasons:

Category Differences – The percentages of buyers who are in or out of the market during a given period are based on how frequently they purchase a particular product or service, and purchase frequency can vary significantly across product or service categories. For example, the percentages will be quite different for a company selling industrial machinery that customers purchase about every ten years than for a company selling personal computers that customers replace every four or five years.

Averages Aren’t Always Accurate – The percentages produced by using the rule are product/service category averages, and they may not accurately reflect the purchasing patterns of your company’s customer base.

Unexpected Events – The rule doesn’t account for unexpected events that may disrupt normal customer buying patterns. For example, the appearance of a major new technology may cause customers to replace their manufacturing equipment more quickly than usual.

Even with these caveats, the 95:5 rule describes a valid and useful principle. It can, for example, enable marketing and sales leaders to estimate when particular customers or prospects may be ready to initiate a buying process.

***

As I noted earlier, Professor Dawes argued in his paper that companies should advertise to potential buyers who aren’t currently in the market. I’ll discuss this issue in a future article.



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