A view on where market share fits in evaluating marketing effectiveness
Once upon a time, marketers believed that the brand with the greatest share of market always wins. Who could argue with the study published in Harvard Business Review (HBR) in 1975, which reported that there was a direct relationship between market share and ROI. At that time, the authors stated it was a correlative relationship not causal. However, the data, as presented, was compelling and market share became the holy grail for thousands of brands.
Fast forward 30-40 years, and the hazard of market share as a business metric becomes a reality.
Blockbuster once dominated the video rental-store market that, when Netflix introduced a new model, shrunk to nothing and took Blockbuster with it. Whatever the reasons for Blockbuster’s demise – failure to understand consumer trends, inability to embrace technology, outdated business model, etc., it is a great example of why market share alone is not an indicator of success.
A recent article in MIT/Sloan Management Review titled “Should you use market share as a metric?” cites two other examples that strong market share was anything but an indicator of profit and success.
- General Motors Co. was the world’s biggest carmaker before filing for Chapter 11 bankruptcy court protection in June 2009.
- In 2013, Apple Inc.’s iPod continued to have a high share of market for dedicated MP3 music players. Too bad the market declined sharply with the rise of smartphones.
Market share as the primary business objective is indeed risky business.
As a standalone metric, it gives brands bragging rights (at best) and can give teams permission to protect and grow market share at any cost, as explained in the MIT/Sloan article. Market share is a vanity metric, right along with brand awareness and likes.
However, within a set of key performance indicators (KPIs), market share can be useful. A note of caution: Be prudent how you define your market share and the level of importance you give to it.
Consider these three questions when framing market share as a metric.
- Relative to whom? As we saw with Blockbuster a few years ago, the definition of the category can be disrupted to near obsolescence by new players, technologies and consumer behaviors. In the recent article in Harvard Business Review, “Why Companies Should Measure ‘Share of Growth,’ not just Market Share,” the authors suggest that competition isn’t brand to brand within a category; it is category vs. category. Soft drinks are a great example here. This realm was once ruled by soda; but it has been redefined with the emergence of bottled juice drinks, bottled water and flavors of bottled waters, at the expense of soda’s share and sales.
- Relative to what? Is the category growing, static or shrinking? Strong market share in a shrinking market, such as the dedicated MP3 music players, doesn’t necessarily mean that your sales volume is growing. CEOs, who are under pressure to not just grow business, but to accelerate growth, may be better served to embrace a share-of-growth metric. The recent HBR article tells us that share of growth engenders a forward-looking view rather than a static, potentially erroneous view of the marketplace.
- To what benefit to stakeholders (employees and customers) and shareholders? Or at what cost will market share come? Will increased market share enhance customer experience and satisfaction? Will revenue and profitability grow with market share? Shareholders want to know if you sold more and made more money, will you do it again next year? And if you can achieve those goals and lead the market, that’s even better, but not at the expense of shareholder value. As we know, General Motors paid a big price to be the No. 1 automaker in the world.
At Rhea + Kaiser, we understand market share is how clients measure success. However, we urge any marketer to consider a balanced scorecard approach to metrics. With a balanced scorecard, we look at non-financial metrics like brand health, consumer sentiment, customer experience and market share in relation to business metrics, such as take rates, customer retention and churn, cost of acquisition, customer satisfaction and, ultimately, ROI and business growth.
Market share is one of several KPIs that marketers can use to evaluate the efficacy of marketing strategies. As a standalone metric, it is dangerous and misleading. Contrary to 40-year-old wisdom, market share is not a bellwether of growth and profitability.
Perhaps Bruce Henderson said it best in his 1989 HBR article, The Origins of Strategy, when he said, “Market share is malarkey.”