The Significance of Market Share

The ultimate proof of a successful marketing strategy is a high market share: the higher, the better. This should not be at the expense of profits; any fool can give their products away—but more on this later. Once attained, market dominance brings many advantages—volume production brings economies of scale, a grip can be exerted on distribution, premium prices can be charged, etc.

Companies with market shares in excess of 40% have twice the profitability of those with only a 10% market share. It is estimated that for every 10% increase in market share, the return on investment rises by 5%.

Three factors are important in building market share:

  1. The continuous and frequent launch of new products. Rick Goings, CEO of Tupperware, said in a recent interview with the Financial Times “You’ve got to look for new product opportunities. Our benchmark is that 25 per cent of sales have to come from new products”. New products bring new sales and new sales increase market share.

  2. The maintenance and continuous improvement of quality products. Companies that consistently build market share in the automotive industry, in telecommunications, and in any business to business market are more usually those that demonstrate that their products are of the highest quality. Witness Apple, Audi, BMW, JCB, Caterpillar, Boeing, Deere, Nike, Coca-Cola, Disney and the like.

  3. A high level of activity by the sales force. Marketers know that high levels of promotional expenditure build market share. In business to business markets, the efforts of the sales force are critically important here and any financial stringency that results in cutbacks of this important activity will threaten the market share.

Market shares are an indicator of the relative strength of a supplier to a market. It is vital intelligence for any company developing its marketing strategy. It is also surprising how ignorant managers can be of their market share. A VP of Marketing whose gut feel tells him that he has a 20% market share may be making incorrect decisions if in fact his market share is nearer 10% and the market is two thirds larger than he thought. Interestingly, most people lacking perfect knowledge exaggerate or are over-optimistic about their market share rather than thinking that it is smaller than it actually is.

Market share also needs to be seen in the context of the definition of the market. Has Kellogg’s got a 90% share of the cornflake market, or a 50% share of the breakfast cereal market or a 5% share of the breakfast market? Depending on how you define your market determines the strategy you will adopt.

Companies can assess their market share in different ways. The lucky ones are part of a trade association or group that contributes data enabling them to determine their market share over time. Even here there can be errors in the calculation as not everyone will be part of the trade association and thus supplying figures.

Estimates of market share can also be made by assessing the size of the market and expressing a company’s revenue as a proportion of that total. This assumes that an accurate assessment can be made of the market size which is in itself a difficult calculation to make. In business to business markets the assessment of market size can often be + or-20%. Furthermore, this doesn’t give market share data on the competition. To achieve this it is necessary to have a good fix on the competitors’ revenues within that market and to express these out of the total market size. Sometimes financial reports provide revenue data on the competition but, more usually, there is obfuscation in that product revenue is not separated out in any detail.

This leaves us with the most tried and trusted way of assessing market share, which is to carry out an industry survey over a representative sample of companies buying the products in question. In order to calculate the market share, it is not just a question of asking respondents which companies are used as suppliers, but to get them to provide a breakdown of their purchases from each supplier. Inevitably, there will be some estimates but over a reasonable sample size the results can be expected to be accurate. Such surveys are not cheap and provide a snapshot at just one point in time. If surveys of this kind are repeated every six months or every year to track the market share, it is an expensive process.

Market share is important but at what price? This is a difficult and contentious question to answer and it was raised at the beginning of the note. In 2013 Amazon adopted an aggressive strategy to build market share. Over the first nine months of 2013 it reported quarterly operating profit margins of 1.9%, then 1.1%, and latterly 0.5%. Prices have been sharpened to build revenue and share. The result so far has been losses and an operating margin in October 2013 which was -0.1%. It is significant that investors have faith in this strategy because, despite the decline in profitability, Amazon’s share price has risen 57% during the year. The market is betting (and it probably is right) that this search for increased market share will bring with it profitability in the long run.

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