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Paradox Of The Market Share Strategy

Entrepreneurs want to bring their solutions to the greatest number of customers and people possible. Commercially they want this scale to grow, capture efficiencies of scale, and ultimately achieve economic profit.

To achieve the original vision, many entrepreneurs embrace a market share strategy to establish a foothold in the market and scale. This strategy is designed to quickly acquire new customers and users; usually winning customers away from incumbents within the market.

To execute this strategy, entrepreneurs use price early and often. With few other tools to leverage, companies use lower prices, discounts and promotions to entice customers to either switch or at least try the product or service. Once the company either captures enough scale or wins sufficient market share, then the company will attempt to move upmarket through its offering and pricing.

The paradox is that making that transition from a volume to a value play is extremely difficult. The reality is very few companies successfully make that leap, and only after significant investment and time.

One of the objectives of capturing market share or outright leadership in a market is to own their pricing destiny. As former PayPal co-founder Peter Thiel explains in his book “From Zero To One”:

“Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices.”

None of this is to suggest that acquiring and growing market share should not be a strategic objective of a company. The purpose is to point out that companies pursuing market share give away the one thing they are trying to acquire via market share – greater influence on pricing.

If you do choose to implement this strategy, here are four considerations to help guide you and your company’s decision-making:

 

1. Market Share Strategy Is Common With Entrepreneurs and Startups. Differentiation is critical.

How does an entrepreneur inch closer to dominating market share? According to Thiel it is about dominating a small market rather than trying to penetrate a large established market. Put it another way, it is better for a company to be a big fish in a little pond, and make the pond bigger over time, rather than trying to eat up big fish in the ocean.

At the heart of this thinking, is that if you want to win market share, then do so where the pressures of competition are lower; where you can control you value proposition and pricing.

To make this assessment, entrepreneurs need to properly assess the market they are in and want to be in, and the customers they need to win. Unfortunately, many companies have not done this work.

For these companies, scale means competing in an out-sized market and capturing even a small percentage because in absolute terms it can be huge. So entrepreneurs will try to “buy” market share by selling at a low or lower price. While not exactly a price war, you’re one step closer.

The core assumptions and success factors are:

  • The company is aware of the actual willingness to pay of customers;
  • Customers understand and value the product on offer (and link to a monetary value;
  • The company can quickly achieve higher pricing benefits by executing on the unlocked value proposition via sales and marketing.

Truthfully these are large assumptions that even better companies struggle to achieve.

It is one way to gain traction without brand recognition and position the company for future growth. With the right execution of this strategy, but companies often find they’ve ignored the one thing that retains customers for the long-run: value.

 

2. Ruthlessly Manage Value

The market share strategy revolves around several objectives including establishing firm footing in a new market or pushing out existing competitors, gaining scale to drive efficiency, and establishing brand credibility for the future.

The hidden risk of this strategy is that firms create “anchor” prices, either through consistently low prices or frequent use of discounts or promotions.

Value can be diluted through aggressive, sometimes even blind, pricing strategies. Those initial low prices set customer expectations about what they should pay for your product, the value they receive, and how they perceive your brand.

The very best sales executives I have had an opportunity to work with shared the same advice when it comes to defending your value through price: “Never start a conversation with your customers about price. If you do, [customers] won’t hear anything else you have to say about your product’s value proposition.”

Defending value means understanding what that value is worth and patience. It is always easy to decrease price, but a long journey to win the value you deserve.

 

3. Effective Hedge: Customer Segmentation

Talk to a pricing consultant and you’ll find examples of companies embarking on this strategy and failing to translate any of the achieved scale into economic profit or value addition.

Customer segmentation can act as a vital hedge. Unfortunately few companies – particularly startups and entrepreneurs – apply it effectively.

One example is Blue Apron- a leading online meal kit provider. The company built a foothold in the meal kit market with aggressive prices, discounts and promotions. It is untold how much revenue ‘leakage’ Blue Apron is experiencing while implementing promotions and discounts to win customers to retain market share.

While Blue Apron did ultimately IPO, it continues to lose money and has since been displaced by incumbents (e.g. HelloFresh) as the market leader and is threaten by new competitors (e.g. Amazon) in its space.

Bed Bath and Beyond also tried to capture market share with low prices but has failed to convince consumers that the brand can provide more pricey luxury products. Many software as a service (SaaS) companies are using a “freemium” model and will likely face similar challenges. Even B2B companies offering products from workspaces to hardware start anchoring prices with discounts and other incentives. Companies who effectively segment their prospect customer base build corresponding packages and can create an effective “value blend” that drives sales.

 

4. Consequences Based Decision-Making

Seizing market share is only the first stage of this strategy. Figuring out what happens once you’ve established a foothold in the market is critical. Think in terms of consequences. What options are available after we make a certain decision? What options are available after that next step?

This approach is both resource intensive at the beginning and resource-intensive to maintain. This is particularly true in markets where customer switching costs are low.

Here are the questions you and your leadership team need to be asking:

  • How do we convert low-paying customers into high(er)-paying customers?
  • How can we defend price increases?
  • What about our value proposition justifies higher prices and how can we confirm that?
  • How will we respond if a competitor or new market entrant also adopts a market share strategy?
  • If we fail to convert customers to pay higher prices, how will that impact our growth prospects?

This approach should align with your company objectives and the value you offer.

 

Final Thoughts

The purpose of this discussion is not to dissuade you from using a market share strategy, but to encourage thoughtful, strategic objectives and planning to be prepared for what happens next.

There are opportunities with a market share strategy, but there is a very real risk of diluting hard-earned value before you have a chance to stake out your position in the market. As Blue Apron and other companies have seen, it’s more difficult and costly to move up the value chain than down. Taking the time to develop a thorough strategic plan for what happens after you seize market share can truly pay dividends in the future.

The market share strategy might be simple in theory but in practice, it can be very difficult to execute. The strategies that work in securing your market foothold (underselling your competitors, frequent discounts, etc.) actually make it more difficult to move up market. You may sell a lot of units as the low-cost option, but that perception may linger with customers long after you’ve decided to move up the value chain.

If you need help working through these issues, there are great pricing consulting and small business marketing consulting firms in Los Angeles that can help your company develop a foundation for future success.

 


Interested in learning more?
If you or your team is interested in having a hosted session on your pricing straetgy and monetization model, please contact us at:contact@helloadvisr.com 

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