Did digital kill the market share stars?

Market share growth in the digital age isn’t what it used to be, according to business management and marketing researchers in Europe.

“Market share regularly ranks amongst the most important KPIs [key performance indicators] for C-suite executives,” write Julian R.K. Wichmann, Alexander Edeling, Alexander Himme, and Felix Sklenarz in a blog piece published by Harvard Business Review. “And for good reason: Larger market share has long been associated with higher profitability.”

But the digitalization of smaller companies has blunted some of the traditional advantages of market share acquisition, the authors note, although they say market share growth is still important.

Studying the financial data of 824 publicly listed U.S. firms over 25 years, the authors found high-digital companies with a large market share turned in a slightly more profitable result than low-digital companies with a large market share in 2018. (i.e. a 6%-7% profit for large, high-digital companies, compared to a 5% profit for large, low-digital companies.)

But among smaller companies, digitalization made a huge difference. Small, high-digital companies averaged a loss of 5% in 2018, whereas small, low-digital companies averaged a 10% annual loss that same year.

The salad days of digital advantage peaked in 2010, when cloud computing, artificial intelligence and the iPad were introduced, the researchers’ data suggests. During this time, smaller, high-digital companies reported profits of just above 5% — only 1%-2% lower than that of their largest competitors.

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Traditionally, large companies recorded higher profits because of three main advantages associated with size, the authors observe:

• greater economies of scale, a quicker learning curve, and barriers to entry for smaller competitors.
• greater market power, giving larger companies better bargaining positions vis-à-vis their suppliers and customers.
• products and services offered by larger firms tend to be of greater perceived quality.

But digitalization has eroded the importance of some of these advantages, the authors observe.

For example, due to the advent of automation and AI solutions — such as Salesforce, for customer relationship management systems, and Amazon, Shopify and Instagram — “even small companies can benefit from advanced solutions,” say the authors.

Plus, advanced technology means small companies can now advertise, sell and ship to a worldwide audience, and target their communications efficiently to niche audiences.

As for market power, smaller high-digital companies have a “vastly broader ecosystem of potential suppliers and customers,” the authors write. “As a result, search costs and supply chain dependencies decrease, access to global markets becomes easier, and market entry barriers dissipate, benefiting low market share firms more than market leaders.”

Add to that, digital marketing solutions for smaller companies are lower-cost than traditional mass-media channels, which require larger up-front investment.

Finally, vastly improved access to information — including comparison sites and online reviews — has eroded the perception of quality associated with the goods and services of larger companies.

For example, the authors write, “footwear company Allbirds sells what it calls the ‘world’s most comfortable shoes,’ and many online reviews seem to agree, resulting in a high quality perception among consumers despite their low market share.”

Market share still matters, the authors conclude, “but less so than in the past.”

“The more digital firms become, the less they should expect market share growth to increase profitability….At the same time, especially low market share firms should leverage digital transformation to increase their profitability and narrow the profitability gap to their high market share competitors.”

 

Feature image courtesy of iStock.com/KatBuslaeva