To Be A Substantial Business …

What does it mean to be a substantial business? Having the largest market share? How does a business get to be substantial? Manfred Hasseler, founder of Swoopo, a pennies auction site says,

“to be a substantial business you have to make as many people happy as possible.”

I disagree. First, I do not know what it means to be substantial and how long that lasts and second, should a business strive to make as many people happy as possible?  The key to any business is making choices, choosing the segment to serve and target them and make them “incredibly happy” and do so in a profitable way. Apple and Blackberry (RIM) do not have “substantial” market share in the mobile phone market and definitely they do not make as many people happy as possible, but those they chose to serve are incredibly happy and it shows in their lopsided profit share of 30% with a mere 3% market share.

Success is defined by the long term profit,  not by the size of market share and definitely not achieved by trying to make as many people happy as possible.

Profit Share – Market Profit Matrix

Your share of the Market Profit!  A 2X2 representation.
Your share of the Market Profit! A 2X2 representation.

See other posts:

1. Marketing metric

2. Market Share Vs Profit Share

Market Share – Profit Share matrix

profit_share_2x2See related post on the perils of using a single metric to measure business success.

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.

Haagen Dazs and Ben and Jerry Pint

I was at Target yesterday and took a closer look at the ice cream display. The same freezer display had both HD and B&J. The containers looked almost same in size, but you an see a subtle difference if you looked longer. The difference is more obvious when you pick the containers up and read the size printed on the packaging, HD is 14 oz and B&J is 16 oz. The price, HD is $3.29, $0.20 more than B&J.

HD is making 12.5% more just from size reduction. Will a customer picking up the ice creams notice the per oz cost? Definitely Ben and Jerry noticed it and pointing this out to the rest of us.

It is not just HD, many other CPG products are now undergoing shrinkage as marketers reduce the size for the same price. The marketing speak for this is “price realization”. I for one tend to believe products are priced lower than what they should be and completely agree with price realization methods. A marketer should not make it part of their messaging to  go after shrinkage of their competitive offerings as this limits their own price realization methods in the future.

Some customers, like this blogger, may look at this as deceptive marketing tactics. There is nothing deceptive about this, the real size is still printed in big size on the packaging. In a typical supermarket a customer has many options, in fact way too many options and can easily choose other products. The stores are also actively pushing their private labels.  What the CPGs are doing is the right strategy, focusing on preserving profit and forgoing revenue and market share.

What do you think?

Page Views or Profit?

Continuing on the pricing for online news media, Alan Meckler of WedMediaBrands wrote a response to the WSJ article by Crovitz. You can find the letter in its entirety in Meckler’s blog.  In that article Crovitz made a case for why it makes sense to charge for differentiated content. Market share or Profit?  Meckler says,

A subscription model has probably cost hundreds of millions of page views per month and perhaps as many as 50 million additional unique visitors. A financial Web site of the magnitude that “could have been” would be worth much more today than the present level of success. A quasi-open and partial subscription model would be far more valuable for sure.

I believe Meckler is making this argument based on possible Ad revenue from the page views. A simplified profit model for online newspaper  (marginal cost is zero ) is

Profit  =   Ad Profits  + Subscription profits

=  f( page views)   +  g ( number of subscribers)

It is easy to see that that  function   f(…) is a linear function and function g(…) is nothing but a constant multiplier.   The number of page views is dependent on whether or not  the website is free or not.

The goal is always profit maximization not   page views maximization. It is easy to see that WSJ or for that matter any online newspaper should pick between   free subscription vs paid subscription based on which maximizes their profits. Worrying about page views is putting horse before the cart. WSJ could have lost out on 100 million age views but if the Ad revenue from these are lower than the subscription revenue that is gained from the 2 million subscribers there is no reason to give it away for free.

Maximizing page views is same as worrying about market share at the expense of profit. Recently many of the leading CPG brands are increasing their profits by giving up market share. It is not  different for Web based services. It is time to break out of Market Share Myopia (with a hat tip to Ted Levitt).