Why you shouldn’t use volume share to set goals and assess your marketing performance
Wednesday, July 20th, 2022
Lots of firms (e.g., auto and motorcycle manufacturers such as Tesla and consumer packaged goods firms such as Reynolds American and PespsiCo among others) use volume market share metrics to set-goals and monitor their marketing performance but our newly published research in the Journal of Marketing shows they should not—we find no conditions under which volume share is valuable in predicting future profits (while revenue market share often is).
Our research uses a large longitudinal sample of firms operating in a wide variety of markets; measures of both revenue and unit share; different definitions of the firm’s “market” in computing market share; and a number of different econometric approaches. We find that on average revenue share has a small but significant positive effect on future profits, but unit market share does not. In addition, we identify two conditions under which growing revenue market share actually reduces firm profits: in the case of “niche” strategy firms; and when firms “buy” market share. For niche firms, larger market share often means they have become broader market players and “less niche” which reduces their appeal to original niche buyers. When firms “buy” market share by lowering their prices, they generally either don’t keep the new customers and/or reduce their margins even if they do. Not a good idea either way.
Importantly, our analyses also allow us to explain when and why revenue market share is valuable to a firm. On average, we show that most of the variance in the market share-profit relationship is explained by the market power (firm’s ability to raise prices) and quality signaling (reducing customers’ quality uncertainty with respect to the firm’s products and services) mechanisms, with much less support for the learning effects (experience effects increasing firm operating efficiency) mechanism. The new understanding of these mechanisms linking market share with firm profits we provide is important because our results show where and why managers may be well advised to rely on market share to set marketing goals and monitor marketing performance—and when and where they should not.
In terms of where managers would be advised to pursue market share because it will lead to increased profits, our results provide a number of new insights. For younger firms and for non-banking services firms, it may make sense to set market share goals and monitor performance. It may also be more beneficial for firms operating in marketplaces where customers find it hard to confidently evaluate product/service quality, and those with higher customer switching costs.
However, it makes less sense for banks, and firms in industries in which pricing power is low, and/or quality is relatively certain. Older firms may also find market share to be of less value as a performance goal metric. Firm pursuing a niche strategy should either ignore market share or ensure that they assess it only within their selected niche market definition.
Additional practical insights in our findings include:
B2C Product and B2B Service firms should set goals and monitor their performance using absolute revenue market share metrics as this is the strongest predictor of profit for these types of firms.
B2C Service and B2B Product firms on the other hand should set goals and monitor their performance using revenue market share relative to the “Top 3” market share firms in their industry metrics as this is the strongest predictor of profit for these types of firms.
For more details, you can get a copy of the full published paper here:
My new Harvard Business Review paper is finally published
Sunday, November 1st, 2020
Well, they took forever, but at last the HBR paper about the thorny issue of how to effectively organize your firm's marketing for growth in a digitally enabled world is in-print. Initial "public" reaction has been overwhelmingly positive. Its good to be right, but much, much better when the work is recognized as being right-on.
The work is based on an almost 3-year research project with a group of very smart (and practical) colleagues. The new framework has been extensively pressure-tested, tweaked, and re-tested with a group of Fortune 500 CMOs plus some Unicorn's and a few smaller companies. We have also worked with a few firms on actively implementing it, and continue to do so. The HBR version (while long for them) is a bit "lite". I will also make available a more detailed "white paper" version shortly.
If you click on the below link, it will take you to a full color copy of the HBR paper. As an author, I get to distribute a number of free copies before I run into any copyright issues.
Hmmmmm..... So, Zappos finally figuring out that "holocracy" doesn't work and moving to a structure with small groups that each have their own P&L and transact with one another. This sound sound familiar to anyone (like "internal marketing")??? You know how much I hate to say "I told you so....." (oops)
Those of you that have taken my marketing strategy class will have heard my 15-20 minute "rant" about why Net Promoter Score (NPS) is such a bad metric. It looks like Fortune has an article coming out about this (it seems it will never go away). I recently came across a short talk done by a friend of mine (Vikas Mittal, a professor at Rice) on the subject (link below). He uses some of my research but also a bunch of research done by himself and others and presents some of the most science-based, cogent, and digestible insights on why you need to be so careful with this NPS metric. Maybe he can be more persuasive than me....
If you know of people who still swear by NPS, forward this link to them:
Seemingly little known facts and marketing metrics
Sunday, May 17th, 2020
Been working this week on a review-type research article on the topic of "marketing accountability" for an academic journal. Came across a recent piece by Neil Bendle (who researches marketing metrics) about how little of academic research knowledge about metrics is known by managers. I agree.
Here are some examples of things that academic researchers know and accept as true that surprise most managers when I share them:
Across markets and over time, the average correlation between firms' top-line revenue growth and bottom-line margin growth is negative and significant
NPS has horrible measurement properties even with sample sizes of hundreds of customers, which makes it vary widely from period to period for no reason
CLV values can be hugely driven by assumptions about customer acquisition costs (which outside of a few DTC industries is notoriously difficult to accurately determine)
Market share does not predict firm profit in many markets, and even for some firms in a single market
In B2C markets market share and customer satisfaction are usually negatively correlated
It is worth thinking about the metrics used in your organization and asking if the above was well-known whether it would change what gets measured and used for goal-setting and performance monitoring.
In other news….whatever else you do, don’t “fire” unprofitable customers
Tuesday, May 5th, 2020
Update: Netflix announces they are going to "fire" inactive customers....maybe this research is more relevant to "right now" than I thought....
While it now may seem like a “first-world” (or maybe that should be “healthy-world”) problem, the reality is that in normal times, a significant proportion of most firms’ customers are either unprofitable or at least significantly less profitable than the rest. What should you do about that reality? I have a new paper coming out shortly in the Journal of Academy of Marketing Science that examines how shareholders react to news regarding firms’ taking actions to address such unattractive customers. The short version is simple. Investors hate it if you directly fire customers—even if it’s only a small number of them. It also seems like they are right to react this way in terms of firms’ subsequent sales growth and margin growth performance. So don’t do it. Much better to use an alternative approach that either gives customers choices (pay a higher price or move to a lower cost to serve service tier), or that these customers don’t even see (stop sending them emails and offers and retargeting them with you web-ads).
