Why market share drives profit

We all know market share is important, but its relationship to the profit a company is able to deliver has remained murkier – new research shines a light on what’s happening and what strategies a business should pursue, depending on its situation.

Why it matters

Market share is clearly a goal for an organisation but is often a particularly important KPI for marketers – now, researchers working with the American Marketing Association have established what drives profit and why you should avoid the temptation to buy market share.

Given that it is such a common way of monitoring marketing performance, the lesson to take is that revenue share is a far more useful predictor of profits than volume, which is simply not predictive of profits.

What’s happening

Based on a longitudinal sample of firms across a variety of markets and with an eye on both revenue and volume share, the research identifies two core mechanisms driving the market share-profit relationship, both squarely in the interests of marketing:

• Market power, i.e. the ability to raise prices
• Quality signalling, i.e. providing an assurance of quality

However, there are also conditions in which market share can have a negative impact on profits:

• Companies pursuing a “niche” strategy
• Buying market share (or pursuing volume share over value share)

What you should do

The research indicates that goal setting and performance monitoring should adapt to different kinds of firms to get the best out of this relationship.

• B2C Product and B2B Service companies: set goals on absolute revenue market share.
• B2C Service and B2B Product companies: set goals based on revenue market share relative to the top three firms by market share in the industry.

Sourced from the AMA, Journal of Marketing