A Popular Performance Metric But Why?
Market share is a very widely used metric. It is often referred to as a specifically marketing metric because people in finance often don’t use it as much.
It is simple to create. One can use the units you sell and compare that to unit sales in the entire market.
Or base the metric upon your revenue and compare that to revenue in the entire market.
While this distinction between unit and revenue share matters — you should always know whether someone means unit or revenue share — I won’t focus on this. The obvious solution is to to always be clear what you mean, and ask those who aren’t clear to be clear.
Beating Other People. Is This Your Goal?
The challenge with (and benefit of) metrics based upon comparisons is that they are relative measures. Yet, business is not about beating other people. (There are plenty of silly business as war metaphors employed but the differences between business and war are pretty obvious given just a second’s thought).
Technically, a focus on beating other people, at the expense of personal success — i.e. sacrificing to hurt others — is called competitor orientation. See the work of Scott Armstrong and Fred Collopy, especially their Journal of Marketing Research paper — my notes on this are here . I would also send you to look at my Marketing Science article with Mark Vandenbosch on Competitor Orientation here.
Relative Metrics, Indicators, and Targets
With a relative metric it is no longer just about you. This can be good when you are trying to see how you fit in the market. I will call that the indicator role of metrics. You can see how you compare with others. Basically, indicators show you were you are.
The Target side of metrics is where you want to get too however. Unfortunately, this is where relative metrics come off the rails. The objective of business is not to be number one at anything. It is certainly not to be one or two in any market. (For older readers can anyone answer what Jack Welch, the GE CEO who pursued this strategy, was supposed to be good at? http://neilbendle.com/evolution-and-jack-welch/.)
Why Might Market Share Be Good?
Market share can often be a useful indicator. There are a number of ways it is suggested it has value.
Economies of Scale
When you are in an industry where Economies of Scale matter. In such an industry you can serve customers more cheaply as more use the service. Here there is logic to aiming for greater volume — basically all firms will dash to lockup customers. Still it isn’t clear why you need market share as a proxy for volume given firms presumably know the volume of their sales without needing to reference the volume of their competitors. Economies of scale track volume, not relative volume compared to rivals.
That Network Benefits are connected to share also has some logic. If customers gain more value the more people use the product then getting big helps. Selling more helps one to sell more. The classic case is the telephone — who wanted the first telephone when they had no one to call?
Unsurprising social networks are another strong example of a network good. The more people who join a social network the more valuable it is and vice versa. Hence when social networks begin to collapse they can implode dramatically. Look at Myspace, or rather don’t bother because there is no one on the site anymore as far as I know.
Again it is worth noting that network benefits track volume not market share. You could be #1 in the market but if your volume is small people don’t gain many network benefits.
Size can be beneficial. Being a powerful player can help and high market share tends to suggest that you have a certain amount of power. That said, it isn’t always clear whether share leads to brand strength or vice versa. High share might get you onto retailers shelves but getting onto shelves can always lead to high share. As such it is challenging to be definitive about the effect of share.
Again it is worth noting that high share is likely to be good in most instances. It can also be a useful indicator of how you are doing but share isn’t the end goal for any firms as far as I know.
Is Market Share Really Your End Goal?
Firms can have a variety of goals. For simplicity in this example lets just say that the firm is aiming for profits. It is important to remember that share is not profits. Why would you have a target something, share, that could be gained while undermining profits which is your end goal?
Chasing share can lead you to make decisions that are not in your best interests. Firms might cut prices to ensure they get a march on the competitor. What happens next? Likely the competitor follows suit. Then we are in a destructive price war. Ironically the chances are that everyone’s market share is likely to be similar at the end, just with much fewer profits all round.
“Chasing market share is almost as productive as chasing the pot of gold at the end of the rainbow.”Bruce Henderson, founder of BCG, in Harvard Business Review
A Problem With Market Share
This is one of the more gameable metrics. The challenge is that to determine your place in the market you need to define the market. Market is a surprisingly poorly defined term. Reid Hastings of Netflix in the early days said he was providing a bike so not competing with the cable companies. Until he decided he was.
The problem with defining market share is that it gives the managers extra degrees of freedom. Not only can they decide to work on unit or revenue share but they can change who they compare themselves to. What should you do then if you want to be ‘successful’? Obviously, you should define the market to benefit you. A good rule of thumb is only say you are competing with worse rivals. This will make you look better. (There is considerable psychological literature on this.)
Imagine giving a bonus on share and allowing the manager to define (and redefine) the market. You can see how large bonuses could be gained as the business goes down the drain. Just make sure you only include weak rivals in the market and you will have a very high share. Circuit City often didn’t include WalMart as a rival in their comparisons. This didn’t stop the bankruptcy.
Summary On Market Share As A Performance Target
There is no unambiguous evidence that market share leads to profits. Cutting prices may increase share but can kill profits. Basically, more share can often be good but it might not be.
My share can go up because of my actions or yours. Increases don’t necessarily show you are doing something right, or decreases that you are doing something wrong if you are aiming for profits.
Market share is not profit. If my share has risen this means my profits may have:
- Or stayed the same
Which makes share often really quite unhelpful.
Share ignores the market’s desirability. Aiming for more share in a market may not be a great idea if the market isn’t desirable. Increasing share in a dying market may not help you much.
Using market share requires a clear definition of market. Who sets this?
It also depends upon who you compare yourself to. As managers can ‘choose their market’ they can also choose how well they are doing. This is a problem with a metric being used as a target. All in all I have to agree with Bruce Henderson, at least a lot of the time he was correct.
“Market Share is Malarkey.”Bruce Henderson, founder of BCG, in Harvard Business Review