What it is: Market share can be a path to greater profits, but the real goal is greater profitability.
I once met a man who sold high-end luxury yachts to the ultra-rich where the average price of a yacht was $96 million dollars. How many yachts did this man sell in a year? Usually zero, but every few years he would sell a $96 million dollar yacht and the profits from that one sale would give him a great lifestyle and tide him over until the next big sale a couple of years later.
That’s the difference between market share and profits. Ideally, you want what Microsoft used to have with Windows, which was both market share and profits. If you can’t have both, then you want to follow Apple’s route and focus on earning greater profits. Or you can go the route that Android smartphone and tablet manufacturers are taking and try to grab the largest market share possible and make up for the profits in volume. Unfortunately for Android device manufacturers, greater market share doesn’t always translate into greater profits.
What’s the best strategy? If you focus on profits, you can make more money with less work and sell to customers who are willing to spend more. If you focus on market share, you often get into a price war trying to sell commodities that customers can easily buy from someone else. When this occurs, your only selling point is to keep cutting prices, until you have to make more and more sales while working harder and harder to sell to price-conscious customers who are the least loyal to any particular vendor.
Would you rather sell one $96 million dollar yacht and make a huge profit, or would you rather sell millions of row boats to make the same amount of money with far more work involved?
You always want to increase market share, but not at the expense of working harder to make less money. What you don’t want is to get into the commodity business of selling the same product as everyone else because then no one has a reason to buy from you, unless you want to get into a price war.
Even Samsung tries to differentiate their Android smartphones from other smartphone manufacturers by offering a smart watch that only works with Samsung smartphones. Amazon’s Kindle runs Android, but has its own app store to more closely tie it with Amazon’s content. With so many companies offering Android devices, they need to differentiate themselves from the competition beyond simply offering a lower price.
What’s been consistently odd is that Android users tend to connect to the Internet far less than iOS users, despite the larger market share of Android. For some odd reason, the average Android user seems to simply want a phone while the average iOS user wants a portable computer.
Around the world, Android smartphones and tablets tend to cost less, especially in countries where carriers don’t subsidize smartphones. Then again if people are only choosing a product based on price, those are often the least likely groups of people willing to spend more money. This might explain why Android users tend to buy fewer apps than iOS users. Business Insider even found that Android users tend to earn less than iOS users.
While it’s easy to gloat that the growing market share of Android proves that it must be superior to iOS, the truth is that every product targets different users. More people buy cars sold by Ford and Toyota, yet no one uses Ford’s and Toyota’s market share to “prove” that Ford and Toyota cars must be superior to cars made by Lamborghini and Ferrari.
As the total market share continues to grow, Apple’s share of the smartphone and tablet market continues to shrink in comparison, even though their products keep selling. The time to worry about the lack of market share is when your products stop selling and your profits start dropping. Just ask Blackberry how it feels to have declining market share and declining sales and profits from products that fewer people are rushing out to buy.
You always want to increase market share, but never at the expense of profitability. General Motors could dominate the automotive market share just by giving away cars for free and paying people $1,000 a month to drive them. No one doubts that this tactic would gain GM massive market share overnight. The problem is that it’s simply not sustainable.
Where financial analysts go wildly wrong is when they forget this basic principle. Market share is a path to profitability, but it’s never the ultimate goal. The ultimate goal is always profitability. If you only sell one $96 million dollar yacht every five years, your market share is close to zero, yet your profitability is extremely high. If you sell 96 million rowboats and make a $1 profit on each one, you have to work extremely hard to earn the same amount of money.
The real goal isn’t market share but a balance between profitability and effort. Ideally you want to work less and earn more. Chasing after market share often means working more and earning less as all those Android device manufacturers have learned the hard way, right after seeing all those PC manufacturers learn the same thing.
When you chase the wrong goal, it doesn’t matter if you achieve it. You still wind up with the wrong goal and outcome. Apple chooses a balance of working less, earning more, and turning those extra profits into continuing to offer intangible benefits to their customers. Before Apple introduced their retail stores with a Genius Bar where you can get help with your computer, other computer companies tried to cut costs by outsourcing their technical support.
Such outsourced technical support meant speaking to someone over the phone who would try to turn you into a computer technician and help you troubleshoot your computer without actually seeing what the problem might be. This experience often frustrated customers because it tried turning them into their own computer technicians. When was the last time you visited a car mechanic who spoke to you over the phone and told you how to do your own oil change?
Market share is a numbers game that ignores intangible benefits like customer service, customer satisfaction, and customer loyalty, which can’t be easily measured in a spreadsheet. That’s why chasing market share is a path for certain failure if you’re willing to ignore product quality, customer service, and customer experience.
If you value saving a penny in exchange for poor product quality, lack of service, and increased user frustration, then you’re not the type of person who understands how business really works. Business is about solving problems and keeping customers happy. As long as you keep customers happy, they’ll be willing to pay any price. The moment you confuse and frustrate customers, your price will always be too high no matter how low you may cut it to increase your market share.