[TL;DR: Byron Sharp's 40+ years of data shows growth comes from new buyers, not loyal ones. Binet & Field show most businesses under-invest in the activity that builds new buyer demand. Tomlinson shows how to allocate budget to fix it. Most SMEs are pointed the wrong direction.]

The Loyalty Trap: Why Your Best Customers Are the Wrong Compass for Growth

Your best customers love you. They refer people. They leave five-star reviews. They buy again without much prompting. Naturally, you want more of them, so you pour energy into loyalty programs, re-engagement campaigns, and retention strategies aimed at turning good customers into great ones.

The problem is that the data — across 40 years of research spanning thousands of brands in dozens of categories — says this is not how brands grow.

Growth comes from buyers you have never sold to. The science is unambiguous on this. But the implications are counterintuitive enough that most businesses never act on them.

The Loyalty Myth Has a Name (and Decades of Data Against It)

Byron Sharp, Professor of Marketing Science at the Ehrenberg-Bass Institute, has spent his career studying how brands actually grow. His 2010 book How Brands Grow is one of the most cited and debated works in marketing precisely because its conclusions are so uncomfortable for conventional thinking.

The core finding is called the Double Jeopardy Law. Smaller brands suffer twice: they have fewer buyers (first jeopardy) and those buyers are slightly less loyal (second jeopardy). Crucially, as brands grow, loyalty does not drive that growth. Penetration does.

Sharp analysed brand performance data across washing powder, financial services, automotive, B2B categories and more. The pattern holds everywhere: the path from small to large is always through more buyers, not more purchases from existing ones.

Here is what the data actually looks like:

For most Australian SMEs, the biggest growth opportunity is sitting in the pool of people who have never heard of them.

"But It Costs 5x More to Acquire Than Retain"

You have almost certainly heard this statistic. It has no reliable empirical support.

Sharp's research found no consistent evidence for the 5x claim. The idea persists because it flatters the businesses that repeat it — it implies the smart move is to double down on existing customers, which feels safer and less expensive than finding new ones.

The real cost structure of acquisition varies enormously by industry, channel, and offer. For many SME lead-gen businesses running Google Ads in competitive markets, the cost to acquire a new customer is meaningful, yes. But that cost must be weighed against the growth ceiling you hit when you stop building new buyer demand.

An SME focused entirely on retention is like a business that only fishes in the same small pond it already owns. The pond does not get bigger just because you fish more carefully.

How Binet and Field Quantify the Gap

Les Binet and Peter Field at the IPA spent years analysing over 1,400 case studies from the IPA Effectiveness Databank — the most comprehensive database of advertising effectiveness in the world. Their landmark work The Long and the Short of It put numbers on what Sharp's buyer data implied.

Their headline finding: the optimal split between brand-building activity and sales activation is approximately 60% brand to 40% activation for most categories. Brand-building is the long-term work of making your business memorable to the broad market. Sales activation is the short-term work of converting in-market buyers right now.

Most SMEs do the inverse. They spend 80-90% of their budget on activation — Google Ads capturing existing demand, retargeting existing visitors, email campaigns to existing subscribers — and almost nothing on the long game of building awareness among people who do not know them yet.

The result is predictable. Activation campaigns can only convert the demand that already exists. If you have not built any mental availability in the wider market, there is no future pipeline to harvest. You are pulling forward purchases from a shrinking pool.

Binet and Field also found something that directly contradicts the loyalty-first instinct:

82% of winning IPA campaigns achieved growth through penetration (new buyers). Only 2% succeeded primarily via loyalty strategies.

That is not a slight advantage for penetration. It is a near-complete dominance across gold, silver, and bronze effectiveness winners.

The 95/5 Rule: Most of Your Market Is Not Ready to Buy Right Now

Sharp's work introduced the concept of Category Entry Points — the specific situations, needs, or triggers that cause someone to enter your category and start considering a purchase. The mistake most SMEs make is assuming that if someone has not bought from them yet, they are either not interested or not a viable prospect.

In reality, at any given moment, only around 5% of your potential market is actively in-market and ready to buy. The other 95% are not thinking about you at all — not because they are loyal to a competitor, but because they do not currently have the need.

This has a direct implication for how you should allocate your marketing. If you focus all your energy on the 5% who are ready now, you are doing fine today and nothing to build tomorrow. The brands that grow are the ones who stay present — through content, brand advertising, social proof, search visibility — during the long periods when potential buyers are not yet in the market. So that when the trigger arrives, those buyers think of you first.

Sam Tomlinson: Where Capital Actually Goes in an Ad Account

Sam Tomlinson, whose newsletter The Digital Download synthesises media buying science with practitioner experience, applies investment portfolio theory to marketing budget decisions. His argument: marketers should allocate budget the way a CFO allocates capital — thinking in terms of marginal returns, risk-adjusted outcomes, and the opportunity cost of the next dollar.

Tomlinson's practical point: most ad accounts are over-indexed on harvesting existing demand and under-indexed on creating new demand. Google Search campaigns are almost pure activation — they capture people who are already searching. If the search volume is not there, no amount of bid optimisation will manufacture it. You can only capture demand that exists.

The brands that compound over time are the ones investing in upstream channels — content, brand awareness, social, video — that build the mental availability Sharp describes, so that when a buyer eventually does enter the market, your brand is already familiar.

This does not mean abandoning Google Ads. It means understanding what Google Ads can and cannot do. Paid search is a demand-capture tool. It cannot create demand where none exists. That work happens elsewhere.

What This Means for Your Business

Sharp, Binet and Field, and Tomlinson are each attacking the same problem from different angles. Together, they point to a straightforward shift in how SMEs should think about their marketing.

Start by asking: what percentage of my marketing budget is reaching people who have never heard of me? If the honest answer is close to zero, you are operating entirely in activation mode. You are fishing the same pond.

The growth is in the water you have not reached yet.

FAQ

Does this mean I should stop doing Google Ads and focus on brand marketing instead?

No. Binet and Field's 60/40 framework is a ratio, not a rejection of activation. Google Search Ads remain one of the most efficient ways to capture buyers who are actively looking for what you offer. The point is that activation alone cannot sustain growth because it only works on demand that already exists. If you are only running Search campaigns and doing nothing to build awareness in the broader market, you will eventually exhaust the available search volume. The right move is to fund both: keep your activation tight and efficient, then direct the remaining budget toward channels that build new demand over time. For most SMEs currently spending 90%+ on activation, even a modest shift toward awareness activity will compound meaningfully over 12-24 months.

How does this work for a local service business with a small geographic market?

The penetration vs loyalty argument is actually more urgent for local businesses, not less. A local plumber, for example, has a fixed geographic catchment. Within that catchment, there is a finite pool of potential buyers. The ones who already know and use this business are already converted. The growth opportunity is entirely in the majority who have never heard of them. Local brand-building looks different from national campaigns — it might mean maintaining a consistent Google Business Profile, producing genuinely useful local content, staying visible on social platforms where the local community gathers, and building review volume. But the principle is identical: reach the people who do not know you yet, and make sure they remember you when the need eventually arises.

My best customers refer me a lot of new business. Doesn't that mean loyalty drives growth?

Referrals are valuable and should be encouraged. But Sharp's research shows that referred customers typically represent a small fraction of total new buyer acquisition even for businesses with active referral networks. The reason is simple maths: your loyal customers can only refer people from their own social and professional networks, which is a limited pool. Referral programs are a useful supplement but they are not a scalable growth engine on their own. The businesses that grow fastest tend to have referral activity running alongside — not instead of — a consistent effort to reach and convert buyers from outside their existing network. Think of referrals as a bonus on top of a solid penetration strategy, not a substitute for one.

How do I measure progress if I am investing in brand awareness and long-term demand building?

This is the genuine challenge and the reason most SMEs avoid it. Short-term activation metrics (clicks, enquiries, cost-per-lead) are easy to track. Long-term brand metrics are harder. Some practical proxies worth tracking: direct search volume growth (more people searching your brand name directly over time), aided and unaided awareness in your local market if you have the means to survey it, new vs returning customer ratios in your CRM, and the proportion of inbound enquiries that mention finding you through non-paid channels. None of these are perfect, but together they give you a picture of whether brand-building activity is accumulating. Binet and Field found that brand effects typically take 6-18 months to show up in revenue data, which is why short-term measurement frameworks consistently undervalue the activity.

Further Reading

• How Brands Grow by Byron Sharp — The foundational text on penetration, mental availability, and the Double Jeopardy Law. Required reading for anyone making strategic marketing decisions.
• The Long and the Short of It by Les Binet & Peter Field — IPA effectiveness research quantifying the optimal balance between brand building and sales activation.
• The Digital Download by Sam Tomlinson — Practitioner-level thinking on media buying, capital allocation, and creative effectiveness. Consistently grounded in evidence.
• Ehrenberg-Bass Institute — The research home of Byron Sharp and Jenni Romaniuk. Free resources on mental availability, Category Entry Points, and distinctive assets.
• Avinash Kaushik on See-Think-Do-Care — A complementary framework for understanding how to reach buyers at different stages of readiness, including the large majority who are not yet in-market.