Book Review: The Myth of Market Share

As countless dot-coms, their VCs, and three large car companies have discovered, buying customers is a lousy business plan.

Put that way, it seems intuitive, but not until Richard Miniter's short but powerful little book, The Myth of Market Share, had I seen it put that way.

Most journalists, most bureaucrats, and too many businessmen operate under the delusion that market share is the royal road to profits. In fact, what matters to investors — and therefore, what should matter to management — is return on investment. Measured by return on capital, market leaders are often not profit leaders.

Why not? Doesn't a large market share mean control of the market, and this, according to Porter's Five Forces model, mean substantial pricing power? Isn't pricing power the whole point of market share? Evidently not. Miniter is positing that nobody has pricing power, at least not outside normal economic cycles.

Then the marginal customers you end up buying are rarely loyal, and have a lower profit margin. Having been bought by low prices, they are the kind that will desert you for them, as well, meaning that you can never raise prices on them in the presence of any competitors.

Moreover, by training consumers to buy only on price, they're commoditizing products that can and should be sold on reputation. Cars and clothes are two of the more obvious products whose nameplates and labels should carry connotations of class and quality above and beyond the mere cost of their manufacture. If Chrysler wants to try to hang on to customers by tossing 100 years of brand equity out the window, they're going to find themselves without either.

Even the companies that make progress through lower prices, notably Wal-Mart, do so not because of their non-existent pricing power, but because of their power as consumers. This is almost always the determinative force: even the trusts were losing their market share by the time they were broken up, and the prices for their products (steel, oil, sugar, rail carriage) all continuously dropped during their existence.

Article Author: Joshua Sharf

Joshua Sharf blogs here primarily as a book reviewer. He has his own site at jsharf.com, and is a founding member of the Rocky Mountain Alliance of Blogs. He is also a contributing editor at Newsbusters. Joshua blogs from Denver, CO.

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