Competing for Market Share—Maybe
Competing for market share drives some of the best—and some of the worst—management decisions in business. Companies are particularly susceptible to going astray at the end of the quarter when they seek to use market share impact to justify horrendous deals—that is, deals that sell out all future quarters in order to make the current one. Here are some guidelines to help you stay on the straight and narrow.
In the category of good reasons to compete for market share, the nominees are:
1. In categories where purchases are infrequent and switching costs are high, making sacrifices to acquire new customers can be offset by future revenues from established relationships.
2. When an emerging category goes inside the tornado of hyper-growth, making sacrifices to acquire new customers can be offset by winning market-leader status, something that confers bargaining power with suppliers, partners, distribution channels, and future customers.
3. In any category where the transactions are profitable and you are not, therefore, making sacrifices to gain market share, more market share is simply a trailing indicator of competitive success.
But each of the nominees above has an evil twin, one who seeks to masquerade as the good child but who must instead be exposed and banished.
1. In categories where purchases are frequent and switching costs are low, making sacrifices to gain market share is a fool’s errand. There is no way to recoup your investment downstream since each new round of purchases reopens the bidding to all comers. As purchasing folks like to say, “You want loyalty? Buy a dog.”
2. When a mature category has a low rate of growth, or worse yet, is heading into a decline, making sales sacrifices to gain market share organically makes no sense. The winning play—to be the last one standing and have enough life left in the category to make that worth while—is only achievable through consolidation.
3. When customers are unprofitable over the lifetime of the relationship, making sacrifices to gain more of them is a bad idea. This is the deadbeat problem, and strategic companies win twice when they prune these customers from their installed base and see them go onto a competitor’s. (On the other hand, if you can convert the added risk into added returns, then one company’s cast-offs are another company’s crown jewels. Just remember, you are not making sacrifices to gain them.)