Member Article

Being the market leader is not the best path to profits

A firm’s market share does not have a strong impact on its financial performance, new research from the University of Cologne reveals.

Instead, companies should invest in building customer relationships and a strong brand.

The research shows that if market share increases by 1%, financial firm performance increases by an average of only 0.13%.

Other related research by one of the study’s authors, Dr. Alexander Edeling, has revealed a much stronger effect for key marketing assets, such as customer relationships and brands. In fact, customer relationships deliver six times the impact and brands nearly three times the impact of market share gains.

“Many CEOs still hold market share to be the most important indicator of corporate success,” says Edeling, “But in today’s digital marketplace, small companies can manufacture in low-cost areas and market and sell to a global audience, competing effectively with category leaders. In addition, maintaining or increasing market share often goes along with decreasing prices or aggressive advertising campaigns, both of which can be harmful for the bottom line.”

Edeling, together with his co-author Prof. Dr. Alexander Himme from Kühne Logistics University, suggests that budgets should be allocated accordingly. Slow and steady investments in innovative products and product quality, enhancing customer service, and building brands with a high-potential target customer base are the best strategies forward to grow and future-proof a business.

To reach these conclusions, the researchers examined the relationship between market share and financial profitability by meta-analysing 89 empirical studies published over 45 years.

The findings were published in the Journal of Marketing.

This was posted in Bdaily's Members' News section by University of Cologne Faculty of Management, Economics and Social Sciences .