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Market Share vs. Profitability?

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The August 16, 2013 issue of The Economist reported “HSBC’s net profit rose by 25% in the first half of the year, but the British bank’s revenue was down by 7%, as it reduced its global presence to focus on its ‘priority markets’.”

At the same time, Amazon reported second quarter 2013 results – $15.7 billion in revenues, $7 million net loss.

Wouldn’t you expect profits to rise as revenues grow?  If you do… you’re living in Seinfeld’s alternative universe.  Here’s why.

Experience

I’ve been in the business world for over 40 years.  In the 25 years that I’ve been consulting with business owners I’ve helped them improve their bottom lines initially by lowering their top line (revenues).  Just as HSBC is doing.

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Reasons

Why doesn’t greater market share translate into increased profitability?  There are a variety of reasons.  Here are a few.  Leadership:

  • Fails to develop a feedback system that monitors the profitability of a given market segment or line of business.
  • Remembers how difficult and costly it was to acquire those customers and is ill-inclined to let go of them.
  • Possesses a scarcity mentality and prefers to live with the devil it knows than the uncertainty of whether or not it can replace those customers.
  • Prefers the bragging rights of size over profitability.

Actually those are the reasons why companies stay with unprofitable business.  How they get into those businesses is another story.

Unprofitable business

In fairness none of us has a crystal ball, consequently we’re destined to choose losers now and again.  It’s human, it happens and there isn’t a great deal we can do about it except learn from our mistakes.

That doesn’t mean that we can’t do a better job of pursuing market share AND increased profits.  The key is to define the market more clearly.  In other words, understand that:

  • If you have to discount to get a sale, you’re no longer talking to people who value what you offer.
  • People who don’t value your offering enough to pay a premium price will never become loyal customers.
  • Offering a cheaper alternative devalues your brand in the eyes of your ideal customer.
  • You don’t need as many customers to generate great profits when those customers are paying premium prices.
  • Staying focused on your ideal customers helps you avoid building an infrastructure that isn’t sustainable in challenging economic times.
  • Customers and lines of business that are very profitable won’t always be; you need continuous feedback on the profitability of each.

Guidelines

These simple guidelines can dramatically improve the quality of your growth strategies and allow you to enjoy both market share and profit growth.  If you do stumble, you’ll be able to recover more quickly just as HSBC is doing now.

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