The more, the better? Why market share often has little impact on profits
More market share = more profitability? So simple – and so wrong. A new study by researchers at KLU shows that a higher market share only has little impact on profitability, especially for companies that score highly in the digital transformation. "Digital companies in particular should be careful and never use market share as the sole reference for the company's performance," says Alexander Himme, Associate Professor of Management Accounting at KLU. The reason for this is to be found in the specific circumstances of digital companies, which affect the influence of market share on profitability.
How are profitability, market share and the digitalization of a company connected? To get to the bottom of this question, the researchers developed a new profitability model based on over 6,000 cases from around 800 US companies from the last 25 years. In order to measure the degree of digitalization, the companies' annual financial statements were combed for certain keywords that indicate digitalization. "Overall, it was clear that the importance of digitalization is increasing for almost all companies," says Felix Sklenarz, co-author of the study, "but there are also very clear differences in the degree of digitalization of individual companies."
Significance of market share for profitability declines sharply
When examining the various cases in the new profitability model, it became clear that the influence of market share on profitability is decreasing significantly, especially for highly digitalized companies. There are various reasons for this. "One example: the digital transformation with its opportunities for automation is replacing learning effects that were previously generated by sheer size - i.e. market share," says Alexander Himme. Market share was also a signal of quality and a barrier to market entry. "However, digitalization is diminishing the power of the market leaders; customers can compare prices quickly and easily online, for example." This makes it more difficult for the "big players" to operate more profitably than their "small" competitors - who can also compete on a global level thanks to e-commerce platforms and fulfillment service providers and pursue multichannel sales strategies.
Internal vs. external digitalization
Various factors influence the extent to which the declining influence of market share affects the profitability of digital companies. These include whether companies focus their digital transformation on internal or external processes, where their general strategic focus lies (value creation for customers through innovation versus monetization of value delivered to customers) and whether they are active in the B2B or B2C sector.
What managers need to pay attention to now
"The bottom line is that endless growth is by no means the right path for all companies," says Alexander Himme. "It also shows that companies benefit from digitalization to varying degrees depending on their size. Small companies with a smaller market share often have more to gain." Managers of highly digital companies in particular should therefore take a close look at the KPIs they use to measure their company's success.
Publication: Felix Anton Sklenarz, Alexander Edeling, Alexander Himme, Julian R.K. Wichmann, Does bigger still mean better? How digital transformation affects the market share–profitability relationship, International Journal of Research in Marketing, 2024, https://doi.org/10.1016/j.ijresmar.2024.01.004.