Market Share and Profitability

 

Profitability and market share are two often discussed performance metrics. Profitability measures a company’s earnings relative to costs. Market share is the percentage of the total customers in the industry who buy from the company.

Market share discussions sometimes eclipse profitability discussions. However, profitability should not be ignored.

As a simple thought experiment, a company could choose to give away their product for free. Assuming the product meets the needs of customers at a minimally acceptable level, the company is likely to control nearly 100% of the market. However, the company would have zero profit. This is unsustainable.

In some instances, focusing on market share may make sense. A large number of customers could be needed for the product to function efficiently, such as with social media platforms. A large market share could also necessary if the company hopes for the product to become the industry standard.

A company can be highly profitable with a small market share if their products have high margins. Operating in a smaller, niche, market may have the added benefit of lower selling, general, and administrative costs. A smaller market could allow a company to design products that offer an excellent customer value proposition, which could increase lifetime customer value.

Businesses must make strategic decisions regarding market share and profitability for long-term success. If market share is the immediate goal, the company must address how they plan to eventually achieve profit. If profitability is the immediate goal, the company must consider how they plan to ensure awareness of their product and whether expansion is desirable. Of course, market share and profitability are not mutually exclusive. The point is to engage in regular strategic discussions of these metrics.

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