Gaining market share is often top-of-mind for many executives. It is a simple metric to understand and visualize, it is usually tracked on an industry-basis and it usually communicates a sense of achievement when the share numbers are looking good. However exclusive focus on market share can also mask numbers that really count – profitability or long-term brand health. In today’s economic environment, many companies are lured into cutting prices to gain market share. The article in the WSJon H-P’s latest moves is an illustrative example.
How wise is this?
H-Ps’ PC Division margins are already under pressure (op-margin down from 5.7% to 4.6% in a year) and it will eventually have to find ways in which to keep its newly-gained customers at higher margins. That may not prove to be easy as the customers they seem to be attracting are the price-sensitive ones. So H-P could lose their share as quickly as it has gained it. Even worse, it may damage some of its brand-equity with loyal customers and teach them to deal-hunt and down-trade to lower-cost options.
While most companies have had to rapidly develop a strategy to address the low-end of the market as customers down-trade across categories, here are some thoughts on how to implement such a strategy, without hurting the entire portfolio:
- Use segmentation to inform your strategy: Not all customers down-trade to cheaper options for the same reason. In a recent assignment for a large discount retailer we learnt that there were four different segments of shoppers who wanted to save money while shopping. While one segment wanted to save because they enjoyed hunting for a deal, one was saving because they wanted to put the money away for a rainy day. Yet another segment of shoppers wanted convenient and effortless savings while a fourth segment wanted the lowest price possible because they genuinely had less to spend. All four segments were looking for ways to save but their motivations and needs in merchandize quality and shopping experience were dramatically different.
- Take a portfolio approach: Many marketers in today’s environment are investing heavily in their entry-level or low-priced products/brands. While this seems relevant given customer behavior for down-trading, lopsided investments will only accelerate the down-trading. Marketers have to equally invest in other brands in their portfolio and give a strong reason for customers to stay with the premium brands. This investment can be through relevant innovations that save customers time/money or genuinely improve their lives.
- Use bundling to average-out the margin: A low-priced product can be used to attract the customer but it can be bundled with other add-ons, accessories and associated products/services that allow you to average out the margin on the bundle. White goods manufacturers and of course quick-service restaurants are especially adept at such bundling techniques.
- Leverage design to maintain differences: Customers should be able to instantly tell the difference between an entry-level, mid-range and higher-end product. The products should not only have meaningful differences but they should look different too. Sometimes in their zest for volume, many companies make their entry-level products look like clones of their higher-end products. While this can be very appealing to customers and share-advantageous in the short-term it can be ruinous to the portfolio in the long-term.
- Have a well-defined role for your entry-level brand: This may sound like a nuance but many companies have a temporary perspective on their market share strategy and entry-level products. It is perceived as a temporary response to a short-lived market situation. These products however have a way of taking on a life of their own and can outlast many of the marketers that launched them. It is important therefore to have a medium to long-term goal for the entry-level product, its role in the portfolio and the contribution that it will make to the overall profitability of the company.
Market share is available for the taking today. Customer attitudes and behaviors are shifting and many competitors are vulnerable. The easiest thing seems to be to cut price and gain volume and share. However the more sustainable and profitable way to gain share is to understand the new needs of customers and innovate (product, shopping, engagement, etc.) to meet these new needs better than competitors.
