Planning, Measuring, Managing Market Share

Posted: 01/2001

Planning, Measuring, Managing Market Share
By Karen G. Strouse

Understanding
one’s market share, represented by the ratio between a company’s total sales and
the total sales of its industry, can be elusive but essential.

Monopoly, oligopoly, perfect competition and monopolistic competition are
familiar market structures that can describe the market share characteristics of
any industry, and provide insight into which market share expansion strategies
will be effective.

A regulated monopoly has a market share of 100 percent. Monopolists need only
to use census counts and demographic research to expand their markets during
times of general growth. They use marketing the political process and the
judicial system to ensure their market share does not decline.

In competitive markets, the calculation and the guardianship of market share
are more complicated.

An oligopoly exists when only three or four competitors control most of the
marketplace. For example, in the present telecommunications market, about
four-fifths of U.S. long-distance revenue goes to three service providers:
AT&T Corp. (www.att.com), WorldCom Inc. (www.wcom.com)
and Sprint Corp. (www.sprint.com). The rest
is divided among tens of thousands of others.

Similar imbalances exist in other segments of the telecommunications
industry, such as wireless, where the need for and the high cost of licenses
limit the number of branded market players.

Market leaders in oligopolies so far have used acquisitions as their primary
way to make significant improvements in market share. They need to strike a
delicate balance between market leadership and antitrust avoidance, as WorldCom
discovered when regulators thwarted its bid to acquire Sprint.

A market in perfect competition has so many players that no service provider
can influence pricing. Monopolistic competition is similar. But a service
provider within monopolistic competition can command a price premium and higher
profitability in its own market niche.

Service providers in markets of perfect competition can realign their
strategies to a monopolistic competition structure in order to gain the
advantages of service differentiation.

In either case, market share for any individual service provider is quite
small, so even measuring one’s own market share is a challenge.

For service providers in these structures and including those that are not
industry leaders in an oligopoly–the market share equation can yield a paltry
ratio, with too many zeroes after the decimal point and too few before it.

Moreover, the high churn experienced in most telecommunications market
segments complicates the measurement of market share as it redistributes the
customer base among the competitive service providers.

Managing share is frustrating if not impossible when share is below 1 percent
and the margin of error is several multiples of that. Still, small service
providers can increase their shares through higher-than-industry growth, mergers
with equals or customer retention.

Leadership Pros & Cons

Market leaders find it easier than their challengers to draw new customers
and investors. They also command higher prices than their competitors.

When examining the telecommunications market, we notice it is moving toward
specialization, while geographical boundaries dissolve. Leadership through
simple magnitude in the global telecommunications services industry would be
impossible for any one company to achieve, and would offer a likely antitrust
target to regulators in the United States and European Union.

Recent initiatives by the three U.S. long-distance leaders and British
Telecommunications plc (www.bt.com) have suggested that the once-sought critical
mass is probably smaller, not larger, than their current company size or scope.

Alternatively, the restructures that are taking place might demonstrate that
focus, rather than magnitude, is the key to competitive success.

A market leader in a small segment will fare better than an also-ran in a
more generalized marketplace.

Still, industry leaders, especially former monopolists, often find that it is
difficult to downscale market share expectations. Look at the mission statements
for many of them, and you will find phrases like "foremost provider,"
"market leadership" and "the world’s best," combined with
"full-service solutions" and "one-stop provider."

In other words, the claim is that they can be everything to everyone. The
result of this bravado is that all but one leader will miss their most
fundamental objectives as described in their mission statements.

Large service providers need to create market targets that concentrate on
their strengths, while they remain willing to cede other segments to their
competitors. The winners won’t always be the other industry giants; they will be
superior niche performers or smaller companies that draw customers with their
own differentiating factors.

To set goals for and then to manage market share, small and medium-sized
service providers need to establish a foundation for market share analysis that
is more measurable than using the overall marketplace as a denominator.

When overall market share is in single percentages or even tenths of
percents, meaningful trends and market positions are difficult to calculate.
Market share changes remain in an exaggerated motion through fluctuations in
one’s own customer base, small shifts in share for competitors and the overall
size of the market with allowances for mathematical error.

To address this management information gap, small service providers need to
delineate their market with clear boundaries among geography, customer groups
and telecommunications solutions that may be included in the business scope.

For service providers, narrowing the strategic focus will improve the
appearance and the management value of market share calculations immediately.
Containing business scope also offers an opportunity to increase profitability,
improve brand recognition, and gain eventual market leadership.

The telecommunications market and its product or its customer submarkets is
not monolithic. Why treat it that way?

Because market share involves a numerator and a denominator, significant and
unanswered changes in either element are critical. Revenue growth looks great at
25 percent, but alarms should sound if that growth occurs in a market growing at
40 percent.

Market share will appear to have healthy growth when the industry declines
and companies are shutting down. Similarly, focusing too narrowly on boosting
share undermines the strategic planning process. Not all market share expansion
strategies are wise. Slashing prices in the hopes of increasing share works in
certain situations and reduces everyone’s revenues in others. In some markets,
expanding market share can diminish the brand’s perceived quality.

Building Market Share

Telecommunications service providers can increase market share in three ways.
The first is to take customers away from competitors. This increases one’s own
share and reduces the share of each competitor, assuming they aren’t taking as
many customers from you as you are from them.

The most effective method to attract customers from competitors is through
branding and service differentiation, not through promotions or price cutting. A
price reduction not based on a service provider’s low cost structure will invite
a price war, which in turn reduces everyone’s revenues.

Chart: Market Share Strategies for Small Providers and Large Providers

Promotions tend to attract the least loyal customers. Once customers have
exhausted the benefits of the promotion, they look for other promotional offers.
This creates cost and churn, and erodes market share in the long run. Promotions
also encourage competitors to match prices or benefits, which adds to industry
costs without a commensurate boost to revenues. If promotions to new customers
are publicized well, they can backfire with loyal customers who rightly complain
that they did not receive the same promotional benefits. Matching the benefits
to existing customers reduces profits and can displease your most faithful and
profitable base.

Second, the service provider who manages its own churn, with or without
causing churn to competitors, will enjoy market share growth as its competitors’
customers rotate among them. Churn in most telecommunications markets ranges
from 20 percent to 40 percent. The telecommunications provider that keeps just 5
percent more customers than its competitors has the equivalent of a 5 percent
growth rate adding to its customer base and its eventual market share.

A Strategis Group (www.strategisgroup.com)
study shows that wireless users planning to churn will do so for a lower price
and to obtain number portability. Therefore, customers will churn just to churn
more easily.

Regulatory initiatives, competitive entry into local markets and technology
undoubtedly will make churning easier in the future.

Service providers who conduct a critical analysis of their customers’ service
experiences will need to gain insight into why customers enter relationships
with the intention of leaving.

Third, the service provider can buy market share through mergers and
acquisitions. Before deciding to do this, the service provider must determine
that increased market share is necessary within its current market structure. If
a service provider holds even a 25 percent share in a perfectly competitive
market that is highly fragmented, its next largest competitor might only have a
5 percent to 10 percent share. Market share of 25 percent can be enough to offer
the service provider the advantages of leadership, such as pricing premiums,
branding and a proportionate share of revenues in a growing market segment.

Suppose that service provider is tempted to buy more market share through an
expensive acquisition. The transaction likely will avoid antitrust scrutiny, but
a large premium could diminish its profitability without offering the synergy
that is often announced and less frequently achieved.

Telecommunications service providers need to monitor and manage their market
share positions as vigilantly as they do their financial and operational
situations. Managing market share takes commitment and sometimes investment, and
could require the development of computational tools or even a reassessment of
the company’s strategy. But a service provider can’t get where it wants to be
unless it is sure where it is.

Karen G. Strouse owns Management Solutions, a consulting firm specializing
in telecommunications planning and marketing. Her book, "Strategies for
Success in the New Telecom-munications Marketplace," was published by
Artech House in 2000. She can be reached at [email protected].