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Market share, pricing and profitability 'strategies'

November 4, 2013 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

A September 11, 2013 Reuters article, "iPhone 5c: Apple picks profit over market share yet again," provides an opportunity to make a distinction between market share, pricing and profit strategies.

In the Reuters article we're finally seeing the financial press acknowledge that there is a trade-off between profit and market share. Generally the financial press is critical of companies that lose market share:

1.  without defining the market;
2.  without determining the bottom line impact of the ‘lost‘ market share;
3.  while implying that profits are going to decline due to that loss.

Yet, as we saw in my September 10, 2013 blog Market Share vs. Profitability, many companies experience greater profits when they shrink their revenues. Why? Because they've rid themselves of customers who don't value what they offer. Consequently, they've eliminated low-margin, high-cost business (price buyers are always demanding more without being willing to pay extra to get it).

With this background, let's explore the distinctions between strategies that focus on market share, pricing and profitability.

Market share

Companies whose primary goal is to pursue market share often don't fare well. Why? Their focus is on their goals, not their customers' interests. Indeed, my eldest nephew who is a certified financial analyst says "Whenever I hear that a company has decided to go after market share I send a 'sell' recommendation because, within 18 to 24 months, that company will be in trouble."

A clear example of that is Toyota. Without a doubt Toyota had the premier reputation for quality in the mid-price range automotive market. Shortly after announcing that they intended to be the #1 automaker, they had a recall that cost them, conservatively, $1 billion dollars.

The reasons that a market-share strategy fails are:

1. The companies don't define the market, they assume that all buyers are potential customers.
2. The companies often discount heavily to get customers who don't value what they offer and lose margin on all the customers that do.
3. The companies significantly grow their infrastructures to accommodate the additional, albeit unsustainable, demand.
4. The companies put their goals ahead of their customers' interests, antagonizing customers in the process.

Other than that, it's a perfectly fine strategy.

Pricing

There are basically two pricing strategies - a low-price strategy and a value-based strategy. Which works better? Let's look at actual results from well-known, well-respected companies.

From 2009-2012 Apple tallied an impressive 44.3 percent compound growth rate (CGR) in revenues and improved operating margins by 14.5 percent. During that same time Walmart's revenues grew by 3.5 percent (CGR) and lost .5 percent in margin and Amazon gained 26.3 percent (CGR) in revenues but gave up 33.3 percent of its operating margin to do so. Which of those experiences would you prefer?

Here's your mental exercise for the day. Is a low-price strategy also a market-share strategy? 

Not necessarily. Toyota decided to go after market share, but chose not to change its pricing to do so. When Walmart decided to go after Target's customers they knew that they'd have to do something different to garner that market. The fact that their attempt wasn't successful doesn't alter the fact that they had an awareness of the need to do something different.

Profitability

While many would say that profits are the reason companies are in business, the reality is that profits are a byproduct of enhancing customers' lives. Any company that focuses on profits will inevitably make decisions that place the company's interests ahead of its customers' welfare and lose those profits. In this regard market share and profit strategies are similar.

Lesson

So where does that leave us? What are we to take away from this discussion? The lesson is that none of the three - market share, pricing or profitability - are good strategies. Your strategy needs to be "enriching the lives of others."

If your product or service makes someone's life easier, more fun, more exciting, safer or better in any way, you'll enjoy great success when you build a value-based pricing approach into that strategy.

Adopt a market-share or low-price strategy and you'll shift your focus from your customers to your company and suffer dire consequences. So when developing a strategy for your business:

1. Focus on how you're going to enrich the lives of your customers.
2. Price to reflect that enrichment.
3. Enjoy your well-deserved success.

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