Why Being #1 May Not Be the Best Path to Profitability

Alexander Edeling (University of Cologne, Germany) and Alexander Himme (Kühne Logistics University, Germany)
 

 

 
Key Takeaways
What: A meta-analysis shows that a firm's market share does not have a strong impact on its financial performance.

So What: Popular thought has led CEOs to believe that being #1 in a market is essential for firm profits.

Now What: Marketing budgets should allocate more resources to building customer- and brand-related assets as well as increasing market share to improve performance.
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GE CEO Jack Welch’s 1983 pronouncement“Be number one or number two in every market, and fix, sell, or close to get there”quickly become a market mantra that persists today. However, it is not universally believed. While many CEOs still hold market share to be the most important indicator of corporate success, others disagree. In today’s digital marketplace, small companies can manufacture in low-cost areas and market and sell to a global audience, competing effectively with category leaders.

To examine the relationship between market share and financial profitability, we reviewed 89 studies published over 45 years to extract 863 data points involving the relationship between market share and firm profits. We considered multiple theories to explain the market shareperformance relationship and created a framework to house these variables in three major groups: contextual characteristics, methodological characteristics, and publication-related characteristics. In addition to being plausible theoretically and practically, variables had to occur in at least 5% of all elasticity observations to qualify for inclusion. In our study sample, firms were categorized as manufacturing, service, or mixed product type and were analyzed against other variables including business type, market growth rate, market concentration, geography, recession period, and time trend.

Studies were selected for consideration if they included an econometric regression model; provided a relative financial performance variable, such as the accounting-based ROI, ROE, and ROS measures or financial marketbased variables such as Tobin’s q or stock return; and measured absolute or relative market share.

Overall, we found that the market sharefinancial performance elasticity is not what it is cracked up to be. Specifically, if market share increases by 1%, financial firm performance increases by an average of only .13% (with 45% of elasticities between 0-100 and 18% of the findings being negative). To put this number in context, other research has found that the average elasticities for key marketing assets, such as customer relationships and brand, are .72% and .33%, respectively. In other words, this means that customer relationships deliver 6x the impact and brands nearly 3x the impact of market share gains alone.

We found 27 factors that might influence this elasticity, meaning the percentage change of performance given a 1% increase in market share. Market share has more of an impact on financial performance for manufactured goods than services firms (difference in elasticites of .07%) or mixed product types (.083%). This finding supports the argument that manufacturing leaders benefit from higher efficiency and market power.

B2C firms experienced stronger elasticities than firms that serve both consumers and businesses (.13%) and those that are only active in B2B (25%). This finding reflects the positive quality assessment (PQ) theory and could be explained by the fact that consumers have lower price sensitivity with a strong brand and/or that business buyers use more rational buying processes than consumers, such as using bidding processes and buying centers.

We found an inverted U-shaped relationship between mean market share within an industry and performance, indicating that elasticities are lower for markets with many niche players or few large players. This may because niche players forsake exclusivity for more market share. and large-share firms price aggressively to discourage challengers.

Surprising findings included:

  • Market growth rate did not rank as a moderating variable, potentially because other variables such as recession, time, and region are controlled for in the study.

  • Elasticities in emerging markets (.15%) and Europe (.15%) were more pronounced than in other markets, including the United States. This may be because the United States is a highly mature, competitive market, and market share increases are only achievable at the expense of product losses.

  • The impact of recessions on elasticities depends on context. Large-share firms benefit from efficiency and market power mechanisms that provide a buffer during recessions. However, when B2B and B2C firms are considered together, the effect reverses, potentially because consumers may be willing to buy less costly goods and market-share leaders may be less flexible in responding to changing trends and threats.

In conclusion, while the market sharefinancial performance elasticity is positive, it is substantially lower than average elasticities for brand-related and customer-related marketing assets. Together, these results imply that marketing budgets should be allocated 61% to building customer-related assets, 28% to building brand-related assets, and 11% to increasing market share. If forced to make a trade-off, study results would suggest that marketing teams should focus on building marketing assets, not boosting market share. These slow and steady investments in expanding products, enhancing customer service, and building brand with a high-potential target customer base truly is the best path forward to grow and future-proof a business.

Read the full article.

Alexander Edeling and Alexander Himme (2018), “When Does Market Share Matter? New Empirical Generalizations from a Meta-Analysis of the Market-Share Performance Relationship​,” Journal of Marketing, 82 (May), 124.

Go to the Journal of Marketing​​

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ABOUT THE AUTHOR:
Alexander Edeling (University of Cologne, Germany) and Alexander Himme (Kühne Logistics University, Germany)

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