Should You Use Market Share as a Metric?

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

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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.

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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.

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