This is an idea that intrigued me. Why would someone not try to increase their market share? The reasons to do so are overwhelming. All modern and traditional learning stresses that we strive to increase market share as much as possible. The upside is manifold. Increase share equals increased revenue which in turn means happy stockholders.
But, sometimes, it does make sense to hold back and actually not increase your market share. Here are the reasons why…
1. If the firm is NOT ready:
If the firm is near its production capacity, an increase in market share might necessitate investment in additional capacity as it will have to meed the additional demand for its products. The big problem is that it poses many capital budgeting questions that the firm might not be in a position to answer. For e.g. how much capacity needs to be present? how much is enough, too much? These are questions that need to be answered after careful analysis. If a company suddenly realized that it’s running out of product in the marketplace, typically it scrambles to meet demand by tolling i.e. using another firm’s underutilized manufacturing capacity to meet demand and at the same time, it thinks about how it can ramp up its efforts at optimal cost. In the end, if the expansion in capacity leads to a situation where the newer capacity is underutilized, higher costs will result.
2. If the firm grabs market share too aggressively:
There’s the right way to increase market share and that’s called customer pull-through. And, there’s the wrong way to increase share and that’s called product push-through. If a company increases their promotional budget too aggressively and decreases its prices too aggressively, needless to say, the bump in product revenue might not be enough to keep EBIT in line with growth levels since the increased marketing spend might more than take the advantage of increased sales away. So, with EBIT in decline, any increase in market share as a result of increasing promotional expenditures or by decreasing prices is a zero-sum game. Comcast spends so much money to aggressively grab market share from Verizon but despite the increased spend, the marginal increase in share hasn’t resulted in high profits.
3. If all firms in the marketplace engage in a price war:
The most amateur of all moves. In a price war, only the customer benefits. All the firms engaging in this tactic lose heavily. A market share grab using a tactic like this is just plain idiotic. Customers buy your product not just based on price but on the other tangible and intangible features that your product possesses. but, marketers to meet short-term goals forget this basic tenet of marketing and engage in an all-out unnecessary price war which erodes profits.
4. If an upstart firm captures market share:
If a firm’s a brand new upstart firm, any market share it captures is at the expense of the market leader which means that it highly possible to wake up a sleeping giant. If that happens, this market leader can reach into its war chest and cause promotional havoc on the upstart. If a small niche player captures only a small share of the market, it’s usually tolerated. However, if that share increases, a larger, more capable competitor may decide to enter the niche and the David Vs. Goliath scenario unfolds. In today’s world, unlike biblical times, very few upstart firms possess the marketing equivalent of a sling-and-stone to stun the market leader and grab more share though one might argue that if an upstart uses digital marketing channels like a website, SEO, SMO, social media, videos etc, it could effectively get the jump on the market leader on the Internet.
5. If the firm dominates the market:
Microsoft knows this lesson. Antitrust issues are always plaguing the company in all the markets in which it operates. While the company is still the overwhelming market leader in the desktop operating system market, it still has to use valuable time and resources to address antitrust concerns.
6. If the firm’s customers are unprofitable:
The applies more to B2B firms that B2C. If a company has low margins from a segment of customers it sells to or services, it should cut its losses. In this case while it might lose market share, the upside is that its profit margins increase.
