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Nine reasons why marketers should pay less attention to market share

ram-ho-_6D4dDeNI-M-unsplash-2 Credit: Ram Ho on Unsplash

 In 2012, the Apple iPhone had an 18% share of global smartphone shipments. Ten years later, sales had grown by 65%, but the brand's market share remained at 18%.

Judged solely on market share, the iPhone's performance does not look so good. Judged on sales and profit, the brand is a blockbuster, responsible for over half Apple's revenue in 2022. This example is a reminder why market share can be misleading, potentially value destroying if used unwisely.

A ubiquitous marketing metric.

I get it. Every marketer looks at their market share. It is an easy way to judge brand performance versus the competition. How big your slice of the pie might be. The problem comes when market share is used as a growth target. When every brand in the same category is fighting for market share bad things can happen (more on that later).

Easily compared across product categories.

The good thing about market share is that it provides an easy way to compare brand status across categories. The same market share indicates a similar status, even in very different categories. For instance, the iPhone's global market share of 18% is comparable to that to that of Pampers in the global baby diaper market. However, differences in category value mean that the iPhone is worth around $65 billion in sales and Pampers about $10 billion.

Confession time. When my team and I set out to develop the brand equity framework that led to Millward Brown's BrandDynamics and later what is now known as Kantar BrandZ, we set out to predict market share. Why? Because, as just mentioned, it is easily comparable across product categories and using it sidesteps the problem that brand revenues differ widely by category. And, of course, pretty much every marketer in the world tries to keep track of their market share.

In our defense, I would say that the model we created was based on respondent level data, predicting share of category purchases, not aggregate market share. However, aggregating up to show a good correlation with market share measured by a third party did prove a compelling sales pitch for many clients. I should also note, given what I am about to say, is that we used value market share wherever possible. To find out why that is important, read on.

Nine reasons to pay less attention to market share.

So why might marketers be better off paying less attention to market share (and educating their management to do the same)? There are nine reasons that I have come up with. There may be more, in which case, please add them in the comments. You may disagree with my thinking. Again, let me know in the comments.

1) Country and category momentum more drive revenue growth.

Back during The Great Recession, I read a book titled, The Granularity of Growth, by Patrick Viguerie, Sven Smit, and Mehrdad Baghai. It was a challenging read for someone who for years had focused on how best to grow market share, because it stated only 21% of revenue growth came from share gain. Where did the most growth come from? Portfolio momentum. In other words, where the brand competes in terms of country, category, and sector has a far bigger impact on revenue growth than market share, accounting for 46% of growth over a seven-year time frame. Where did the rest come from? Mergers and acquisitions at 33%.

Think back to the iPhone example. Apple is not the most valuable brand in the world today because it grew the iPhone's market share. Apple is the most valuable brand because it created and competes in a fast-growing category in fast-growing markets. Momentum matters. And as the authors of The Granularity of Growth note, the choice of where to compete was probably made years ago. It is also a decision likely made by the company's senior management, the brand manager may have input, but otherwise they have little choice but to play the cards they are dealt as best they can.

2) Market share is tough to change.

While market share gain is not the biggest driver of growth, the authors of The Granularity of Growth do see growing share as important, if challenging. They note that share loss is often judged harshly. And they also note that 80% of companies gain or lose only a small amount of market share over time. This finding agrees with my own experience. An analysis of 3,907 brands measured in Kantar BrandZ found that only 6% grew their market share in the course of a year, and only 6 out of 10 of those growth brands managed to sustain that growth over three years.

Growing market share is tough. In any industry, all brands are fighting hard to win and retain customers. Most marketing initiatives, even if successful, are quickly countered. If you set aggressive growth targets, you better be willing and able to go big and double down on your marketing. Viguerie, Smit, and Baghai state,

"When we analyzed the top fifteen share gainers, one thing stood out: they've all made big choices – strong commitments to create distinctive (and possibly disruptive) business models – on the basis of insights or distinctive advantages."

Again, this finding accords with my experience. Successful market share growth originates from doing something different from the competition and committing to it wholeheartedly.

3) Market share is a weak predictor of profit.

Looking back over the last thirty or more years of papers on the subject, the academic world has vacillated between market share does predict profits and market share does not predict profits. This suggests that the overall relationship between market share and future profits is weak at best, and, indeed, that is what a recent meta-analysis 89 studies by Alexander Edeling & Alexander Himme finds. Their analysis identifies a "raw" mean market share–financial performance elasticity of 0.132, indicating a significant, positive effect of market share on financial performance. However, they also note that while substantial, this effect is lower than might be expected based on elasticities from a similar meta-analysis for customer satisfaction (elasticity of 0.72) and brand equity (0.33).

Unfortunately, there is reason to believe that the raw elasticity may overstate the impact of market share on financial performance. Most of the models included in the analysis did not allow for feedback from financial performance to market share. In other words, they do not allow for the fact that marketing investment should impact market share and marketing investment is dependent on financial performance (we all know what happens to marketing budgets when financial performance is weaker than budgeted). When Edeling and Himme attempt to correct for this type of bias, they find that the influence of market share drops by half (0.065). Still statistically significant but much weaker.

4) Market share is rooted in the past.

97% of the studies in the sample analyzed by Edeling and Himme examined market share and financial performance in the same period. This raises a similar problem to the one mention just now, which is the chicken, and which is the egg?

I will come back to this later, but to my mind this highlights a very basic point. If something is worth making a target, then there needs to be good evidence that it anticipates financial performance and is not just related to it. Otherwise, you might just as well look at the financial results at the year end. This problem is compounded for market share because measurement is only available after the fact. Even if you are a consumer packaged goods marketer with access to Nielsen, Kantar Worldpanel, or IRI data, market share is a backward looking metric. It tells you want has happened and does not necessarily tell you what will happen.

5) Your industry definition is likely wrong.

Setting aside the issue that some devious brand managers might game the category definition to favor their brand – instant drinking chocolate does not compete with traditional, no sir! - just because your industry defines its category a certain way does not mean potential buyers will do the same.

New competition often comes from substitute or adjacent product categories. The Apple iPhone may not have taken a big chunk of share away from other smartphones, but collectively smartphones have undermined the sales of point-and-shoot digital cameras. Sales of cameras with built-in lenses have plummeted since 2010. Interestingly, Canon has doubled its overall market share over that period. Now that could be because Canon has the best innovation and marketing, or it could be because Canon dominates the interchangeable lens segment, sales of which have held up better than built ins. It is difficult to tell which from the share data alone.

6) Market share focuses attention on the competition.

This is a far more insidious problem. Back in the days of Millward Brown, I remember being told by a new manager that it was arrogant to assume that we could not learn from our competitors. However, there is a fine line between learning and copying. Paying too much attention to direct competition may lead to in-the-box thinking. Paying too little attention may result in being blindsided. However, given that most brands have a clearly defined set of competitors, I suspect that the biggest risk comes from the former, particularly when there is substantial crossover of personnel from company to company within a category, ideas and principles become accepted as given across competing brands.

The UK retailer Tesco got itself in big financial trouble a few years ago in part because it paid too much attention to the success of discounters Aldi and Lidl. As these brands began to gain traction, due in large part to their low, low prices, Tesco tried to fight fire with fire, instead of playing to its strengths. Tesco could have played up its range of product categories and manufacturer brands, the quality of its private label products, or focused on delivering great customer service. Instead, Tesco tried to fight low prices with discounts. Operating margins suffered and in 2015 Tesco announced a $9.5 billion loss.

7) Defending market share can trigger a price war.

This point leads on from the previous one. If you pay too much attention to what the competition is doing, particularly when it comes to pricing, it is far too easy to devalue the entire category. No one wants to admit that they lost market share. It looks bad to the board, and it looks bad to shareholders. But if there is one thing those people like less, it is lower profits. The risk is that in trying to avoid losing market share lower price gets used to maintain it, opening the way to what Jim Kilts used to call The Spiral of Doom: sales shortfalls, increased discounts, cuts in marketing, missed forecasts, and repeat.

The only thing that is worse than a brand entering The Spiral of Doom is when all brands in the category get locked into the same cycle. The sad thing is that retailers seem particularly prone to competing on price and getting into a price war. Before inflation took hold, Costco, Walmart, and Target looked set to follow in Tesco's footsteps. The problem is that the repercussions of a real price war can be huge. According to this paper, some estimates suggest that the overall losses suffered by the US airline industry because of a price war in 1992 exceeded the combined profits for the entire industry to that point. In the short-term customers reaped the benefit of cheaper flights, in the long-term they reaped the rewards of cramped seating, poor service, and mechanical delays.

8) Market share's importance differs by industry.

Taking Edeling and Himme's findings at face value, their analysis found big variations in elasticity to market share by industry and business type. Manufacturing had higher elasticities than services. B2B had higher elasticities than B2C.

These findings make intuitive sense. It seems likely that economies of scale will accrue to standardized manufacturing processes rather than the messy business of dealing with people directly. However, is that really a function of higher market share, or is it a function of higher volume? Turning to B2B compared to B2C, perhaps market share gives a company more power to negotiate a good deal with suppliers? Whatever the reason, it is apparent that market share is not necessarily equally important in every industry, even if it is easily compared across them.

9) Market share is a proxy for more important things.

Last, but certainly not least, we must ask whether market share is really a surrogate for more important things that have a more direct impact on financial performance.

Back in 2021, I wrote this post referencing an American Marketing Association article titled, Examining Why and When Market Share Drives Firm Profit, by Abhi Bhattacharya, Neil A. Morgan and Lopo L. Rego. An important conclusion from their analysis is that value market share predicts future profits while volume share does not. Even so, adding value market share to a model based on firm size, advertising spend, R&D spend, and market growth did not improve the overall fit of the model, even though the inclusion was statistically significant.

Notably, when measures of market power, operating efficiency, and perceived quality were included alongside market share the main contribution of market share becomes insignificant. Of the three factors, the findings suggest that market power (the ability to raise prices more than the average when costs rise) and quality signaling (measured by quality ratings from Equitrend) have a stronger impact on future profit than operating efficiency (although this links back to the previous point that economies of scale will be determined in part by the type of industry).

Beware of market share my friends.

Such a simple metric. So easily calculated. So easily compared. So potentially misleading.

My main conclusion is that if you set market share goals as a growth target, you are asking for trouble. The easiest way to grow market share is to lower prices versus the competition, but unless your business model can support those lower prices you will likely regret making that choice.

What might be better metrics to use?

  • For a start, how about revenue? What is the growth rate across country, category, and segment. Could you adjust investment to get a better growth rate? Better yet, why not measure margin or profit? Like market share they may be backward looking, unless you look at velocity, but at least you know they matter. 
  • How about acquisition and retention rates? Are you gaining or losing customers faster than similar sized brands (remember, bigger brands do have an inherent advantage)? 
  • How about pricing power? Can you raise prices more than the average for your industry? Do perceptions of your brand justify its price point?
  • How about customer satisfaction? Yes, that too comes with a boatload of challenges. Like market share, blindly trying to increate satisfaction can erode profit. For a start, satisfaction needs to be judged relative to comparably priced brands in the same category. All cable companies suck, but some less than others.
  • How about brand equity? What people think of your brand does matter. If nothing else, if your brand is not on their radar when they are considering a purchase, then it is unlikely to get chosen.

If you must use market share as a target, then use value market share. Value market share captures the influence of price paid and is less misleading than volume market share. Or maybe look at share of growth to make the metric more forward looking?

Whatever you use, every metric has its own potential pitfalls, but perhaps market share has more of them because it is so familiar, we lose sight of what it really means, where it comes from, and how it gets used. But what do you think? Please share your thoughts. 

P.S. If you still believe that growing market share is important, check out 10 actions that will drive profitable share growth

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July 12, 2024