Popular marketing metrics, including market share, are regularly misunderstood and misused.

Market share is a hugely popular metric. In a survey of senior marketing managers, 67% found market share based on dollars spent “very useful,” and 61% found market share based on units sold “very useful.”1 One explanation for why managers value market share so highly probably has to do with well-known research from the 1970s that suggested a link between market share and ROI.2 However, the linkage may be less clear than most managers would suspect, and studies have found it is often correlational rather than causal.3 Not surprisingly, there has been substantial academic pushback on the value of market share as a useful performance metric, epitomized in a 1989 article by Boston Consulting Group founder Bruce D. Henderson, in which he proclaimed that “market share is malarkey.”4

Nevertheless, many managers continue to pay attention to market share, and some vigorously defend its value. Rather than having an endless debate, many marketers have tacitly agreed to put the discussion aside. Hence, market share remains on management radar and continues to be taught in MBA curricula with little discussion as to whether it is an appropriate marketing objective in any given market.

In our research, we found that there were usually two ways managers used market share: as an ultimate objective or as an intermediate measure of success. Using market share as an ultimate objective is hard to justify. Many managers believe that the primary purpose of a business is to maximize shareholder value, although for some the purpose is also to serve the interests of nonowner stakeholders such as employees and customers.5 However, increasing market share isn’t a meaningful ultimate objective for either of these groups: If the aim is to maximize the returns to shareholders, increased market share offers no benefit unless it eventually generates profits. Despite this, we found that more marketing managers thought it was more important to prioritize maximizing market share than to prioritize maximizing profitability.

Managers commonly argue that market share is a useful intermediate measure — in effect, a leading indicator of future success. In some markets, market share probably does help increase future profits, but this is not always the case: General Motors Co. was the world’s biggest carmaker before filing for Chapter 11 bankruptcy court protection in June 2009. Therefore, it is critical to understand the expected relationship between market share and profitability in your specific market.

In some markets, bigger can be better; the most obvious examples are markets with economies of scale. Companies in such markets can reduce their cost per unit by selling more — thus increasing overall profits. If you think you are in such a market, you should confirm that the economies of scale you think exist actually do. Economies of scale do not automatically apply to all markets. For example, consulting does not get substantially cheaper per hour to provide at higher volumes. Even when greater size does bring benefits, marketers should still measure size in terms of volume sold, as opposed to market share. Although market share is related to volume, the two are not identical: When the overall market size shrinks, market share can remain stable or even rise as volume falls. For example, Apple Inc.’s iPod continued to have a high share of the market for dedicated MP3 music players, but the size of that market declined sharply with the rise of smartphones.6 Further, measuring volume is easier to calculate than market share.

In some settings, market share can be a proxy for power. Depending on the setting, relative size can matter, and having a bigger market share can encourage others to treat your company more favorably. For example, when it comes to dealing with retailers, a category leader such as Coca-Cola may be able to negotiate better deals than a weaker brand can; retailers need Coke on their shelves more than they may need a smaller brand. A similar logic applies to network goods, which are products for which the benefit to consumers increases when more people use them. For example, Facebook’s value to its members increases when more of its members’ friends use it. Overall, though, the research on the relationship between profits and market share is ambiguous. There is no general rule; the importance of market share varies from market to market.

Market share has other complications. For instance, figuring out who your competitors are in a given market can be a judgment call. Consider, for example, the changing product categories offered by computer makers. Do high-end tablets compete in the laptop market? Microsoft Corp. claims that its Surface Pro 4 tablet computer can “replace your laptop.” A company’s market share in a given category depends on how the company defines the market: To increase market share, it can redefine the market to exclude a competitor.

Additionally, because market share is about relative rather than absolute success, market share objectives can drive companies to initiate unprofitable attacks on competitors.7 In many industries, price wars have had devastating effects on profits.

Unmuddling Market Share

We suggest a simple set of rules to determine the appropriate use of the market share metric. First, don’t use market share as either an ultimate objective or as a proxy for absolute size. Second, consider the perspective of other businesses. Will they behave more favorably toward your company if your market share increases? Next, consider the consumer. If you cannot explain in simple terms how the consumer will benefit from industry consolidation, your product is not a network good, and increased market share will not matter to consumers. Finally, analyze whether market share drives profitability in your industry. For example, does higher market share lead to increased profits? Bear in mind that this is different from assessing whether market share and profits are correlated. Companies with superior products tend to have high market share and high profitability because product superiority causes both. This means that the two metrics are correlated — but it does not necessarily mean that increasing market share will increase profits. Using market share as a metric of success simply because other companies do can be counterproductive.

This material is excerpted from the article “The Metrics That Marketers Muddle,” by Neil T. Bendle and Charan K. Bagga. See the full article for advice on how to use five popular marketing metrics.

References

1. P.W. Farris, N.T. Bendle, P.E. Pfeifer, and D.J. Reibstein, “Marketing Metrics: The Definitive Guide to Measuring Marketing Performance,” 2nd ed. (Upper Saddle River, New Jersey: Pearson Education, 2010).

2. R.D. Buzzell, B.T. Gale, and R.G.M. Sultan, “Market Share: A Key to Profitability,” Harvard Business Review 53, no. 1 (January-February 1975): 97-106.

3. D.M. Szymanski, S.G. Bharadwaj, and P.R. Varadarajan, “An Analysis of the Market Share-Profitability Relationship,” Journal of Marketing 57, no. 3 (July 1993): 1-18; and R. Jacobson, “Distinguishing Among Competing Theories of the Market Share Effect,” Journal of Marketing 52, no. 4 (October 1988): 68-80.

4. In this article, we do not aim to definitively show the connection (or lack of connection) between market share and profitability. Our aim is more modest: To show that the causal path is not as clear as managers may believe — making it important to not assume that market share and profitability always go together. For an example of academic pushback, see R. Jacobson and D.A. Aaker, “Is Market Share All That It’s Cracked Up to Be?” Journal of Marketing 49, no. 4 (autumn 1985): 11-22; for “market share is malarkey,” see B.D. Henderson, “The Origin of Strategy,” Harvard Business Review 67 (November-December 1989): 139-143.

5. For competing views, see, for example, M. Friedman, “The Social Responsibility of Business Is to Create Profits,” New York Times Magazine, Sept. 13, 1970, 32-33, 122, 126; and R. Phillips, R.E. Freeman, and A.C. Wicks, “What Stakeholder Theory Is Not,” Business Ethics Quarterly 13, no. 4 (October 2003): 479-502.

6. S. Cole, “Apple’s iPod Continues to Lead an Ever-Shrinking Market of Portable Media Players,” Dec. 19, 2013, http://appleinsider.com.

7. Possibly the staunchest critic is J. Scott Armstrong, a marketing professor at the Wharton School, who has authored several papers addressing the problems of chasing market share; see J.S. Armstrong and F. Collopy, “Competitor Orientation: Effects of Objectives and Information on Managerial Decisions and Profitability,” Journal of Marketing Research 33 (May 1996): 188-199; and J.S. Armstrong and K.C. Green, “Competitor-Oriented Objectives: The Myth of Market Share,” International Journal of Business 12, no. 1 (2007): 117-136. For a theoretical explanation of how competitor orientation can persist even in markets that reward profit-maximizing companies, see N. Bendle and M. Vandenbosch, “Competitor Orientation and the Evolution of Business Markets,” Marketing Science 33, no. 6 (November-December 2014): 781-795.