Expanding market share


Market leaders can improve their profitability by increasing their market share. In many, markets, one share point is worth tens of millions of dollars. A one-share-point gain in coffee is worth $48 million; and in soft drinks, $120 million! No wonder normal competition has turned into marketing warfare.

Gaining increased share in the served market, however, does not automatically produce higher profits—especially for labor-intensive service companies that may not experience many economies of scale. Much depends on the company’s strategy.

Because the cost of buying higher market share may far exceed its revenue value, a company should consider four factors before pursuing increased market share:

1. The possibility of provoking antitrust action, such as recently occurred with investigations of Microsoft and Intel. Jealous competitors are likely to cry “monopoly� if a dominant firm makes further inroads. This rise in risk would diminish the attractiveness of pushing market share gains too far.

2. Economic cost. That profitability might fall further market share gains after some level. In the illustration, the firm’s optimal market is 50%. The cost of gaining further market share might exceed the value. The “holdout� customers may dislike the company, be loyal to competitive suppliers, have unique needs, or prefer dealing with smaller suppliers. The cost of legal work, public relations, and lobbying rises with market share. Pushing for higher market is less justified when there is small scale or experience economies, unattractive market segments exist, buyers want multiple sources of supply, and exit barriers are high. Some market leaders have even increased profitability by selectively decreasing market hare in weaker areas.

3. Pursuing the wrong marketing-mix strategy. Miller Brewing spent $1.5 billion on measured advertising during the 1990s but still managed to lose market share. Its ad campaigns were highly distinctive but, unfortunately, also largely irrelevant to its targeted customer base. When it was acquired by SAB in 2002, new management overhauled marketing operations. Companies successfully gaining share typically outperform competitors in three areas: new-product activity, relative product quality, and marketing expenditures. Companies that cut prices more deeply than competitors typically do not achieve significant gains, as enough rivals meet the price cuts and others offer other values so that buyers do not switch. Competitive rivalry and price cutting have been shown to be most intense in industries with high fixed costs, high inventory costs, and stagnant primary demand, such as steel, auto, paper, and chemicals.

4. The effect of increased market share on actual and perceived quality. Too many customers can put a strain on the firm’s resources, hurting product value and service delivery. American Online experienced growing pains when its customer base expanded, resulting in system outages and access problems. Consumers may also infer that “bigger is not better� and assume that growth will lead to a deterioration of quality. If “exclusivity� is a key brand benefit, existing customers may resent additional new customers.