Part II: Narrowing Your Focus
Your organization can’t be great if you try to serve too broad a market. With every new market you target you run the risk of diluting your offerings. No where does this become more obvious than in conversations with clients about raising prices.
Market Share Objection
The objection I get most often when talking to business leaders about raising prices is “We’ll lose market share if we don’t discount.” This inane infatuation with market share results in some of the most bizarre strategies any of us could imagine. One of the most ludicrous I’ve heard recently is from a company whose margins have been shrinking for five years. The CEO set a target of 5% growth in market share.
Can someone please explain to me how this company is going to attract more customers when its existing customer base no longer values what it offers? A reality evidenced by five years of shrinking margins.
When people no longer value what you’re offering how can you possibly expect to increase the number of customers you have without shrinking your margins further? To increase ‘market share’ you’re going to have to go after buyers who have even less interest than your current customers. To get them you’ll have to offer deeper discounts to them and existing customers.
This infatuation with market share is one of the reasons we have had seemingly endless cycles of hiring and downsizing in the past 30 years. The desire for market share causes sellers to pursue customers who don’t value what they offer. Basically, there are three markets that any of us face:
- Buyers who value what we offer and are willing to pay our price.
- Buyers who are moderately interested and only buy when the price is discounted.
- Buyers who aren’t going to buy regardless of how low the price gets.
If you’re going to pursue market share make sure that you’re basing your calculations on category 1. My experience is that most companies combine categories 1 and 2 when calculating market share. Here’s the problem with that approach.
During good economic times, buyers are more likely to spend money on things in which they have only a modest interest if the price matches their level of interest. Sellers sense this and begin discounting to attract the second-tier buyers and do so successfully. Often the additional sales generated more than offset the revenue losses from discounting to their existing customers.
Sounds good, doesn’t it? It does until you realize that you’re adding capacity (production and administrative) to serve customers who will evaporate when money gets a little tight, the economy tanks or another shiny object grabs their attention. The capacity you added will have to be eliminated when any of these things occur.
When you weigh the short-term incremental gain in profits over what you could have gotten from your ideal customers vs. the cost of adding infrastructure, including hiring, training and learning curve costs and the cost of the buyout/termination packages on the back end, in the vast majority of cases you’ll find that gaining market share was an insanely costly proposition.
What’s the solution? How can you use these insights to accelerate the economic recovery and get recognized as a consistently great company? Narrow your focus.
Narrow Your Focus
Let’s take a look at a ‘market share’ war that’s raging right now to gain some insights into how costly these wars can be and how to avoid them. For years Verizon’s ads have been beating up on AT&T by stating that Verizon’s service is more reliable. Ostensibly that’s because Verizon has invested heavily in a network that serves rural America as well as metropolitan areas as demonstrated by Verizon’s map.
AT&T is fighting back with claims that they serve 97% of the U.S. population and have faster download rates. Their ads do not address Verizon’s claim of more reliable service.
I’m not here to judge the accuracy of either company’s claims. I do, however, believe that there are lessons to be learned from these ads. Here’s what I surmise from these ads.
Verizon’s competitive advantage is dependability. Their ideal customer is someone who values the dependability their network provides regardless of where they’re traveling.
AT&T, on the other hand, has targeted large metropolitan areas where people are more likely to use apps. Their faster download speeds may be one of the reasons why Steve Jobs chose AT&T over Verizon.
Assuming that both companies’ claims are legitimate, Verizon’s ideal customer is someone who places great value on dependability and is content with slightly lower download speeds for apps. This trade-off between dependability and download speeds is one their customers are willing to make.
Conversely, based on their ads, AT&T’s customers appear to be more concerned with internet access speed and less concerned with dependability. Their customers are trading speed for reliability.
Given these customer profiles, my question is “Why are they spending so much money trying to attract customers who don’t value what they offer?”
They’re trying to gain ‘market share.’ The problem is that neither has defined ‘market’ accurately. They’re both viewing anyone who uses a cell phone or PDA as being equally valuable to them.
The reality is that both companies are going to have to offer discounts to attract the other’s customers. Dependability buyers aren’t going to switch to AT&T unless they get a really sweet deal. Even then they’re likely to switch back if they regularly experience dropped calls or internet access.
Similarly, Verizon isn’t likely to attract those customers to whom internet access speed is their primary interest unless they offer significant discounts. Even if they’re able to get these people to switch from AT&T, it’s likely that the slower download speeds will drive them right back into AT&T’s arms.
What does this mean for both companies? It means that they’re spending huge sums of money to attract customers who don’t value what they offer. They’ll only get those customers by offering significant discounts. The retention rate on these customers will be low. They’ll have invested in infrastructure costs (production and administrative) to serve customers who won’t be with them for very long. Oh, by the way, they’ll have given up revenues by having discounted their prices to their ideal customers.
The future will belong to those companies who narrow their focus to serve only those who value what they have to offer and are willing to pay the price to get that value. Truly great companies will continue to utilize this strategy during good economic times when buyers are willing to part with money for things with which they have a fleeting interest.
The next step in accelerating economic recovery and achieving greatness is stimulating job growth. That’s part three of this series.
Author – Dale Furtwengler