Do profitability and market share not always come together, you may ask? To some people this question is heresy. To others it is simply obvious. The reason for this is that most business people have been brought up to believe that market share needs to be grown constantly, even if prices need to be kept at constantly low levels.
The prevalence of this thinking appears to be based on a logical theoretical underpinning. Most business school students since the 1970s have come to learn that growing market share leads to various scale economies leading to lower costs and hence greater profitability. Hence, the thinking goes, price lower to build market share and you’ll be fine from a profitability perspective.
Does it make sense to keep growing market share at the expense of profitability
However, this view has changed. Companies are increasingly questioning whether this logic is in fact always correct. Some have suggested that the theory was based on a somewhat flawed conclusion from a study which found that market share and profitability are correlated. Yet, a correlation between market share and profitability does not mean that market share necessarily leads to profitability. Clearly correlation and causality are not the same thing as many statisticians will concur.
Additionally, the notion that high market share results in ever decreasing costs and therefore higher profitability is also debatable. In the 1970s this may have been the case. In fact this may still be the case in certain industries. However, we have all seen price wars to build individual competitors’ market share, that do not leave the overall industry, or most of its competitors, any better off than when they started the price war. Besides the obvious disadvantage of too much production capacity chasing too few customers in a market, other considerations such as evolving technologies also play a role.
How technology is changing the competitive playing field
As technology changes, the need to produce large volumes to constantly lower cost is no longer always a prerequisite. More to the point, the fact that products and services can in fact be customised more easily, and at lower cost with emergent technologies, suggests that they have the potential to be more differentiated and can therefore command higher prices than their competitors’ offerings.
For instance, consider how 3-D printing has allowed manufacturers to produce cheaper moulds for injection moulding in short periods of time. This provides them with the benefit of being able to customise their products for different segments rather than being forced to provide one product only due to the high cost of producing an injection mould.
Consider also how 3-D printing is enabling sports shoe manufacturers to customise shoes for the individual customer, and in so doing produce the product on demand. This creates substantial product differentiation while lowering the potential for customer switching. It also removes the need for offshore production facilities thereby reducing potential obsolescence, logistics-related costs and production lead time.
Bring segmentation into the picture to adapt your point of view
If you take this thinking further, and you start asking whether highly differentiated products that can be made at relatively low cost, operate in the same market, you may conclude that they do not. Therefore, the very notion of growing market share in one large market that is perceived to be homogenous may not be ideal. In fact there may be several submarkets within one larger market as a result of technological advancements that are able to successfully adapt to particular consumer needs. This makes the original question of market share versus profitability redundant.
Furthermore, the idea of treating customers as a large homogeneous group of people is problematic. Competitors that are able to segment a market into several profitable sub-markets can generally differentiate themselves more effectively and command higher margins within each of these sub-markets. Several progressive organisations have latched onto this idea and largely abandoned the market share paradigm to pursue a sustainably profitable future. How do you plan to reconsider this in your business?
About the author
Alan Ohannessian started WisdomInc in 1999. WisdomInc focuses on Pricing Strategy, Brand Strategy and Analytics. He has consulted to over 70 global and local brands across 15 industries during this time.
Prior to this, he started a Customer Relationship Management consultancy within the Ogilvy Group in the mid-1990s and worked within the Ogilvy Group over a 5-year period. He was also lecturing Marketing Strategy, Consumer Behaviour and Retail Marketing during the early 1990s at the University of the Witwatersrand, Johannesburg.
He has a B Comm. (Hons) from the University of the Witwatersrand in Manufacturing Strategy where he focused on how to mass customise products at competitive prices. He also has a Master of Commerce degree from the University of the Witwatersrand which focused on distribution channel strategy and logistics.