I read a great book the other day. It was titled “The Myth of Market Share” by Richard Miniter. What Minter discusses is that there are too many companies that are obsessed with the concept of being #1, “the biggest & the best”, the largest in its industry. For some reason business leaders believe that there is a direct relationship between the size of a company (their market share) and having bigger profits. Bottom line is that the perceived #1 company in any given industry, might not just be the most profitable, nor the healthiest. Minter goes on to say that, in fact, the most profitable company in their respective business segment was not the company with the largest slice of the market and that more than 70% of they also did not have the highest rate of return. Miniter then goes on to say that in 23% of the industries, the fourth largest company had the best profits Bottom line size does not lead to profits.
Common Myths
- The Company with the largest share can raise prices – In most cases raising rates tend to send customers to competitors with lower prices.
- Size naturally creates higher returns- 7 times out of 10 the most profitable firm was not the largest.
- Economies of scale lower cost- The idea that the more you make, the cheaper they are per unit isn’t always valid. As companies grow they typically add layers of personnel which quickly cannibalize the profits.
- The experience curve improves efficiency- This theory states that unit costs should decline as a companies output grows, however, when a company is growing it is typically focused upon enlarging production, instead of wringing cost savings out of the process.
- Higher Market Share Attracts Exceptional Managers- There is no proven documentation anywhere that shows that larger companies have better personnel. I know many small companies that had exceptional people working for them.
Market Share Damages the Brand
The quest for getting big, too often causes companies to make decisions that hurt their brands. An example would be the company that lowers there prices to get a large contract or to generate large amounts of business. The problem with this is that in doing so they more often then not set the pricing standards for the new client below what they actually are. If you are charging $100 for a product or service and the price has been lowered in order to get me to buy, you have set my expectations to that level for the remainder of the time I am a customer. The problem is that next time I come around to purchase, you have created the perceived price and value for your product. You have also created a psycological feeling of negativity for me when you now tell me that you have raised your prices or that you have to charge me the normal rate & that the first time I purchased it was a introductory offer.
Why Profit Leaders Beat Market Leaders
There are 3 types of companies in every industry: Profit leaders (those that make all of the money), Market Leaders (those that have the largest share of business) and everyone else.
Sometimes the Market leaders are the profit leaders, largely because they were the first into a industry. Sometimes the profit leaders become market leaders, but rarely does a market leader become the profit leader. Why?
Profit leaders avoid the dangerous discounting that saps the strength of their brands, they avoid foolish mergers for the sake of size and they focus upon the customer, rather than the competition. They set the value of their products and their prices and stick to them. They focus upon value and service to the customer rather than upon growth for the sake of growth.
I learned this the hard way. A couple of years ago, I was with a company that moved into a new market. In order to gain marketshare quickly we ran discounts on our products only to find that business wasn’t increasing & that we were fighting to get every dollar that we could for our product. It wasn’t until I took the oppportunity to sit down and speak with a company that was referring us a good portion of our leads did I find out that his largest client was a company that was charging about 30%, more than we were at the time. Funny, thing was there product was virtually identical to ours. That was a real eye opener. Bottom line is we made some pricing changes, improved our sales and our service and ended up becoming a very profitable business in that market. Not only did our market share grow, so did our profits.
Jay C. Contreras
http://www.linkedin.com/in/jaycontreras
www.c5worldwide.com
