Putting Profit First… Even Over Market Share

Market share is the holy grail for many firms. The more customers one has or the more units it sells, the better off it will be than its competitors. Sometimes, that reasoning plays out, other times it does not. Market share is relatively easy to build. I liken building market share to the insecure guy who buys rounds of drinks for everyone at a bar. He has lots of friends (i.e., market share) as long as the drinks are flowing. When his fortunes change and the money to buy drinks is gone, so are many of his friends. At that point, the money the poor guy has little to show for his investment.

The relationship between market share and profit works the same way. A company can build market share but do it in a reckless manner that hurts profitability. Ultimately, a business is striving to maximize profits, not the number of friends it has! Be cautious in foregoing revenue to gain market share via a low selling price.

In a recent interview, Dell founder and CEO Michael Dell indicated that a strategic shift in his company is emphasizing profits over market share. He is willing to give up Dell’s second place standing in PC market share if it means greater profits per unit sold. Dell summed up the strategy when he said “Do we want to sell the most numbers of units? No, we want to have the most profit.” That mindset will serve any organization very well.

Bloomberg.com – “Dell’s ‘Reshaping’ of PC Maker Means Chasing Services”

Are Market Share Gains Worth Profit Margin Losses?

An article in The Wall Street Journal this week reported how Hewlett-Packard has set out to become the market leader in PCs. A key strategy in H-P’s quest is using low price to attract buyers. Case in point is offering an entry level laptop for just under $300 in the recent back-to-school selling period, with plans to do more of the same this Christmas. H-P is moving toward its goal of being the market leader, with its 2nd quarter market share hovering around 20%. Dell, H-P’s chief competitor, had just under 14% share for the same period.

Market share is nice to have, but it is crucial not to lose sight of the profit picture. H-P’s operating margin was 4.6% in July, down almost 1% from the same period last year. The prevailing mindset in the pricing game has always been to set a lower selling price, and additional sales volume will make up for the lost revenue. Nice concept, too bad it rarely happens. In this case, H-P’s expectation could be that increased sales of PCs will lead to sales of complementary, higher margin products, such as printers, ink cartridges, and other peripheral devices. Another interpretation of H-P’s pricing strategy is a signal that it sees PCs becoming more of a commodity, making it difficult to maintain high profit margins.

For its part, Dell appears to staying out of a price war with H-P. It is focused on its own profit situation, and giving up profits to sell a few extra PCs does not seem to be an option for Dell at this time. Market leadership and profitability are two distinct metrics. Dell has chosen to find some other approach rather than price to compete in the PC market. At some point, Dell may feel compelled to fight H-P’s prices, but for now it is pursuing more profitable options to compete.

The Wall Street Journal – “H-P Wields Its Clout to Undercut PC Rivals”