The Market Share Myth

The financial press focuses heavily on market share? Is that the an appropriate measure?

Often when we see headlines stating that a company lost market share, we assume it’s a bad thing.  Why?  Because that’s what the financial press has led us to believe.  They speak of market share as if all customers are created equal. 

You need only look at the range of profit margins you experience from your customers to know that isn’t true.  So how should you view market share?

It’s counter-intuitive, but the market you want to measure is the one in which your customers are paying the highest premiums.  Unless you have 70% share of this market or more, you’ve still got plenty of opportunity left.

Many companies make the mistake of trying to increase “market share”, their customer base, by attracting the next tier of customer – those that don’t value their offerings as highly as the first tier.  Consequently these companies have to lower prices to attract these customers and they do. 

Unfortunately existing customers (those paying the premium) want the same discounts.  Now these companies are giving up revenues and profit margins from their ideal market in hopes that the new revenues will more than offset the discount losses.  Even if their able to replace the revenues, they’re making larger investments and working much harder to make less money per transaction.  Is there an alternative? 

Again, it’s counter-intuitive but if you can develop an offering in which that second-tier customer is interested, even if it’s at a lower price point, you can develop a new market to serve with price points and profit margins equal to those of your first-tier customers.  Indeed, for this new market, they will become first-tier customers.  Now you can measure your share of this market separately from your original market.

Don’t be fooled by the financial press’s cavalier attitude toward market share.  Identify your markets carefully, measure your market share, then look for ways to increase your market share through creative new ways to serve those customers – ways that don’t involve lower prices on existing offerings.

Author – Dale Furtwengler