Market Share Or Profit Share?

Would you prefer to get 50% of the market share (in whatever market you play in?) Almost all businesses would like half the market.  The focus on market share is built into every marketing campaign, sales and pricing decision made. Is market share the right metric to measure a business’ success? One other metric that was popularized by BCG was the Relative Market Share (RMS). It tries to add more relevance by measuring success of the business relative to others.

Relative Market Share (I) = Brand’s Market Share ($,#)/Largest Competitor’s Market Share ($,#) (source link)

For the market share leader, the largest competitor is the second largest competitor. For everyone else it is the market share leader. So for the business with 50% market share in a market where the next biggest competitor has 20% market share, the leader’s RMS is 2.5.

RMS does add more relevance over the simple market share metric. RMS, combined with market growth rate, is used to position the business in the BCG 2X2 (Star, Cash cow, ???, Dog). But does this still tell anything about the profits the business is making or what it takes to bring in the profit? Is the market share leader with 2.5 RMS in a growing market better off than its competitors?

Let us look at the cellphone market share and profit share metrics reported by The Wall Street Journal.  The chart “Ringing Up Profits” comes from the WSJ article. Looking at the simple market share numbers, Nokia is clearly the leader with 45% revenue share and Apple is no where to be seen on the revenue share.  The next biggest competitor to Nokia is Samsung that has a market share of 31%. So the RMS for Nokia is close to 1.5.

Next let us look at the profit share. Again Nokia is the leader with close to 59%. The next biggest competitor with most profit is not any Samsung, it is Apple with 20% share of the toal market profit.

If we used a metric “Relative Market Share Profit – RMSP” which is similar to RMS except computed using profit numbers, Nokia has a RMSP of close to 3.

Yet if you looked at Nokia’s latest earnings its not doing great. Barrons magazine wrote “sell” after the earnings report. Today Apple announced blow out numbers, 15% increase in net profit. Apple stock has been on a tear. So why Nokia with a high RMS number doing financially poorly and Apple with extremely low RMS is doing extremely well even in the down market?

The answer lies in what it takes to deliver the profit and RMS does not capture this data. Apple and RIM with a total of less than 3% market share have 35% of the total profit in the cellphone market. That clearly point to the high variation in the operating margin between  Apple+ RIM and the rest of the cellphone makers. The variation comes form the product mix – Apple and RIM sell just the high margin smartphones. The smartphone revenues  are still a very small fraction of the overall cellphone market but have a disproportionately higher share of the market profit.

The simplicity of using one metric like RMS to describe the market dynamics, while attractive, is far from useful in defining it meaningfully. Yet I am compelled to do just that with a different single metric,  “Relative Profit-Revenue Share Ratio “. This is defined as follows

Profit-Revenue Share ratio  =      Profit share %/Revenue Share%   ( let us call this  PR Ratio)

Relative  Profit-Revenue Share ratio =   PR Ratio/(PR Ratio of  largest competitor)

If we use the numbers from the WSJ article and computed the ratios, the results will look like this

rp-ratioNow we can see which market player is most effective in wringing out profits out of those revenues.