Not that a revelation like this was a shock to me. In today’s world with the proliferation of the Internet as a major channel in terms of getting customer attention, brand building, product sales and customer management, the marketing playbook has changed. Drastically.

Kotler writes about how a firm can engage in a certain set of activities to influence buyers to purchase their product or service. This set of activities is referred to as a marketing mix which is typically based on the four P’s:

· Product: Products manufactured and sold today must be better or different in some way to engage customers to purchase it.

· Price: Standard cost-based pricing, which simply adds a markup to the cost of a product, is no longer effective (maybe for a generic product but otherwise not). Instead, he promotes value-based pricing, where prices are not based on their cost, but based on their value to the customer

· Place: The rules of the game have changed with the Internet. Newer channels means newer ways of thinking on how to add value to the product selling process and newer places of selling it.

· Promotion: Use the right mix of delivery and communication tools to deliver a message that resonates with potential buyers.

Bottom line - companies can no longer rely on their former business practices to sustain prosperity. Busines assumptions and practices that were practiced ‘then’ with the ones being increasingly practiced ‘now’ are detailed by Kotler as follows:

Then

1. Make everything inside the company. (Fully owned)
2. Improve on one’s own.
3. Go it alone.
4. Operate with functional departments.
5. Focus domestically.
6. Be product-centered.
7. Make a standard product.
8. Focus on the product.
9. Practice mass marketing.
10. Find a sustainable competitive advantage.
11. Develop new products slowly and carefully.
12. Use many suppliers.
13. Manage from the top.
14. Operate in the marketplace.

Now

1. Buy more things outside (Outsource).
2. Improve by benchmarking others.
3. Network with other firms (Collaborate).
4. Manage business processes with multidiscipline teams.
5. Focus globally and locally.
6. Be market-and customer-centered.
7. Make adopted/or customized products.
8. Focus on the value chain.
9. Practice target marketing.
10. Keep inventing new advantages.
11. Speed up the new product development process cycle.
12. Use few suppliers.
13. Manage up and down and across.
14. Operate in the marketspace.

The checklists above are clear indicator of a firm’s approaches to managing profits. The elements of the ‘Now’ list are viewed as more effective modern approaches to managing profitability. A company can almost tell how much it has adopted contemporary business practices by placing a check in each list on either the ‘then’ or the ‘now’.

If most of the checks are on the ‘then’, then that company is trouble. How does one know that? Well, declining market share, loss of customer confidence, negative buzz in online and offline channels, lower production outputs and hemorraging costs should be a good indicator.

If there are low barriers to entry in an industry, the easier it is for other firms to enter this industry. In such a situation, new entrants could change major determinants of the market environment (e.g. market share, product pricing, customer loyalty) at any time. There is always a hidden pressure for reaction to any change in the market dynamics and adjustment for existing players in this industry.

The threat of new entries will depend on the extent to which there are barriers to entry – the greater the barriers to entry, the less prone is someone’s inclination to enter the market. The lower the barriers, the easier it is for someone to enter the market. The barriers to entry typically are:

• Economies of scale. This means the minimum size requirements for an operation to be economical.
• High initial investment and fixed costs. This is essentially a cost barrier.
• Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets. With fixed costs depreciated, existing firms will enjoy significant costs advantages.
• Brand loyalty of customers. If the brand has major penetration in the market, then it’s hard to get customers to switch.
• Protected intellectual property like patents, licenses etc.
• Scarcity of important resources and raw materials. Here whatever’s available could be controlled by existing players who have long-term contracts in place.
• Distribution channels are controlled by existing players. This is a problem as a new entrant will then have to either forward integrate or enter into distribution contracts with existing players and take a hit on operating margins.
• Existing players have close customer relations. This is about long-term contracts with a strong customer base and is highly relevant in a B2B scenario.
• High switching costs for customers. Changing to another supplier will involve significant costs from a process and management standpoint for a customer and they may not be inclined to go with a new entrant.
• Legislation and government action prohibits new players in the market.

Threat of Substitutes

A threat from substitutes exists if there are alternative products with lower prices or better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products.

Similarly to the threat of new entrants, the threat of substitutes is determined by factors like

• Brand loyalty of customers. The biggest brands will have the highest market share. Changing loyalty means changing habits and that takes too much time.
• Close customer relationships. From a B2B perspective, that’s a hard one to break.
• Switching costs for customers. Customers want to cut costs not increase them. The value proposition of the new entrant’s products need to be extremely high to entice a switch.
• The relative price for performance of substitutes. If the substitute does not perform as well as the original, then there’s a problem.
• Current trends.

Competitive Rivalry between Existing Players

This force describes the intensity of competition between existing players in a market. High competitive pressure results in pressure on prices, margins, and profitability.

Competition between existing players is likely to be high when:

• There are many players of about the same size, Same size implies that the same amount of resources will be available to carry out the marketing tactics in an industry.
• Players have similar strategies. Enough said, with a similar strategy there’s a limited amount of market share that you can grab.
• There is not much differentiation between players and their products, hence, there is a lot of price competition
• Low market growth rates. Here the growth of a firm is possible only at the expense of a competitor, However, in such a scenario, with limited growth the potential of upside is virtually nothing until a disruption derails a competitor.
• Barriers for exit are high. With a lot invested in capital equipment which is expensive and highly specialized, it makes little sense for someone to exit the market – in such a market, it’s also possible to partner with competitors from a manufacturing standpoint and have tolling agreements to utilize capacity.

The competitive strategy should be based on a strong understanding of the industry structure and how it may possibly change. In the online world, this principle does apply though in slightly different ways.

Porter identified five competitive forces that shape every industry and every market. According to Porter, these forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to play against these competitive forces in a way that the market share or position of the firm in question is improved.

Bargaining Power of Suppliers

The term ‘suppliers’ comprises all sources for inputs that are needed in order to provide goods or services.

Supplier bargaining power is likely to be high when:

· The market is dominated by a few large suppliers.
· There are no substitutes for the core raw materials required for manufacturing.
· The suppliers’ customers are fragmented so their bargaining power is low. This essentially means that the market is fragmented with many pieces carved out between many players. This also means that the product in question is very generic in nature.
· The switching costs from one supplier to another are high.

The relationship of the firm to powerful suppliers can potentially reduce strategic options for the organization because of their clout in the market.

Bargaining Power of Customers

Similarly, the bargaining power of customers determines how much customers can impose pressure on margins and volumes.

Customers bargaining power is likely to be high when:

• They buy large volumes and there is a concentration of buyers which makes the buyer pool limited.
• The supplying industry comprises a large number of small operators which means that it’s very competitive.
• The supplying industry operates with high fixed costs. This is true when suppliers deliver a high value-added raw product component.
• The product is undifferentiated and can be replaces by substitutes, In this scenario, a generic product competing in the marketplace implies the presence of multiple duplicate products.
• Switching to an alternative product is relatively simple and is a low cost-proposition. Here multiple substitutes are available.
• Customers have low margins and are price-sensitive.
• Customers could produce the product themselves. If a customer has the scaling capability within his existing production facilities to backward integrate some of the manufacturing for their raw material components, they do posses strong bargaining power.
• The product is not of strategic importance for the customer. In this situation, the product may represent a very small portion of annual revenue from a firm’s product portfolio and may not of strategic importance.
• The customer knows about the production costs of the product. If the customer has the capability to produce the material in question, it’s highly possible that he’s aware of the costs involved.

Continued in part II coming next…

But, what happens during times of hardship? Like today, for instance where we’re in the middle of a recession. As always, we try to escape from the stark realities that surround us and in a recession, we try to do more of the same. That’s why fantasy shows and movies typically get the largest audiences. The ‘Twilight’ movies, the other fantasy experience shows that people have latched on to so readily like ‘Heroes’ and ‘Lost’. The bottom line is that people are looking for a way to escape but, they’re also looking for happiness and they find it in both fantasy and reality-based shows. Reality-based shows allow folks to look at others’ lives and smugly agree that they’re better than them. It’s about indulging a fantasy like a hook-up on a reality show as well as looking on with disdain when someone does something sneaky or heinous to win a spot – like the Survivor show.

A good example is the prevalence of vampire shows. There is a certain attraction towards the undead. It’s like the attraction towards the ‘X-Men’ characters from Marvel Comics. The real reason why people navigated towards the ‘X-Men’ was because they were the closest thing to being human and yet, superhuman. The value of community among the “undead” is attractive to most of us ebcause we too want to be part of the cool gang. The main characters in these shows illustrate how to embrace living under the threat of their lives disintegrating at any time by accepting the risks and trying to connect deeply with one another. The key takeaway is that we should focus on obtaining happiness no matter how fleeting it may tend to be.

Consuming under the threat of temporary happiness, means consumers try to find happiness in their lives through their purchases. It’s almost as if they don’t want to be reminded about how tough things are or how tough things used to be. they create this fall sense of security or a false reality for themselves and are are ready to move forward with it. They discover happiness through their consumption habits.

Businesses try to help consumers find happiness in everyday things and try to show them how their products contribute to that elusive goal of happiness. Best Buy is one retailer that has successfully capitalized on the ‘happiness’ opportunity. They realized that instead of talking about products and performance and price like everyone in consumer electronics had always done, they had to completely change their approach. While the latest technology and coolest stuff was appealing, it wasn’t a convincing call-to-action to purchase. So they created their  “You, Happier” campaign (see the clip on YouTube) which focuses on the joy of helping, the joy of giving – the intangible benefits of the products and not the direct tangible benefits.

The bottom line here is that this trend will continue. Businesses will strive to extract  as much sales as they can from the emotionally-detached masses that they sell to. And Mad Ave, will continue to make this happen.

The takeaways were as follows :

The B2B buying decision making funnel is all about managing risk. In this case, there are two risks to manage: organizational risks and personal risks.

• Organization risks involve quality, reliability, commitment and execution.
• Personal risk is about management, decision making and good judgment.

Greater risk interns of project size, purchase value, perceived benefits usually involves the buyer having more resources from the business and other functional areas available to aid with the buying decision process.

The big problem with risk however, is that it creates fear and emotion which turns the process into a non-rational process. It’s important to understand how the B2B marketer can mitigate this. Some risk mitigation thinking for a B2B buyer involves working with an established B2B brand.

Brand building suddenly become a key factor in the decision making process as  some firms might be inclined to work with a certain supplier but require the pedigree and successes to rationalize it.

B2B buying criteria also varies because the core product tends to be very different from a mass marketed product:

• Price fluctuations are few. Unless pricing for raw materials changes drastically, most B2B pricing stays the same.
• It goes without saying that most B2B products are “technical” products that are either used as part of the manufacturing process or used to help another organization build its capabilities.
  
• Need less to say, B2B products have shorter distribution channels.
• In this channel, services are more important than the actual product even though product spec is key in the initial supplier vetting process.
  
• B2B products are very very utility based. The possibility of obsolescence arises if the utility is diminished in certain ways. Style has little to do with a B2B product.
  

Another big piece was having better integration between online and offline marketing. In many organizations, traditional marketing functions are yet to collaborate effectively with digital marketing to determine a unified campaign strategy to engage the customer.

Both channels work with each other to deliver a unified message to drive sales. Also, it’s critical that any marketing campaign have complete lead attribution so that it’s possible to identify actual leads from specific sources. this helps to close the loop on all marketing efforts. Things like a unique url on print to calculate how much traffic was generated as a result of print, a unique 1-800 phone number to know how many people called you as a result of your direct marketing, a google utm tracking code on urls to power your google analytics to give you metrics at a ‘campaign’ level.

First, you determine which kinds of customers exist, then you select which ones you’d like to sell to and, finally you optimize your products/services for that segment and communicate to that segment that you differentiate yourself from competitors because of the characteristics you possess.

Segmentation’s about finding out what kinds of customers or consumers with different needs exist.  In the breakfast cereal market, for example, some consumers demand nutrition and health, while others might just want Cheerios.  Let’s dive deeper into customer segmentation. At a very basic level, there are three approaches to marketing.

Undifferentiated:

For firms following an undifferentiated strategy, all consumers are treated as the same with firms not making any specific efforts to satisfy particular groups.  This may work when the product is a standard one or very generic.  Commodities is one such product category. CRT televisions is another one. To an extent, PCs are another such product category with very little to differentiate between competing firms.

Concentrated:

In the concentrated strategy, one firm chooses to focus on one of several segments that exist while leaving other segments to competitors.  For example, Southwest Airlines focuses on price sensitive consumers who will forgo meals and assigned seating for low prices. Ditto with Payless Shoes who cater to price-sensitive shoe buyers.

Differentiated:

The auto industry tries to follow a differentiated strategy. Recently, all of them have been jockeying for attention by claiming superior environmentally friendly features. The Toyota Prius did have a first-mover advantage in that regard. Most airlines follow a pricing strategy rather that a differentiated strategy:  They offer high priced tickets in advance to business travelers to try and fill capacity and then sell some of the remaining seats to more price sensitive customers who can buy two weeks in advance and stay over.

Segmentation is not easy.  There are many variables that are used to differentiate consumers of a given product category. It’s essential to determine which variables distinguish different groups of consumers best.
Several different kinds of variables can be used for segmentation. Let’s start with demographics.

Demographic variables are essentially personal statistics such as income, gender, education, location (rural vs. urban, East vs. West), ethnicity, and family size.  It is also possible to segment on lifestyle and values. Some consumers want to be seen as similar to others, while a different segment wants to stand apart from the crowd.

Consumer behavior is another basis for segmentation.

• Some consumers are very brand loyal.
• Some consumers are heavy users while others are “light” users.  For example, research conducted by the wine industry shows that some 80% of the product is consumed by 20% of the consumers—presumably a rather intoxicated group.

Benefits segmentation: You can also segment on benefits sought thus bypassing demographic explanatory variables.  Some consumers use toothpaste primarily to promote oral health, while another segment is more interested in breath freshening. Or some consumers prefer the Starbucks experience where they get their coffee packaged within  an ambiance and other prefer the fast-food Dunkin’ experience. It’s key to understand that segmentation should be a scientific process – mere qualitative information is not enough to carve out a potential customer base. In the end, it’s yet another consumer behavior analysis which adds more depth and comprehension to the consumer marketing process.

What do they mean essentially? A simple definition would be that the two of them produce results. Period.

A business needs to do two things well to succeed: Marketing and Innovation. All the rest of the business support these two functions.

Jack Trout pointed out in an article that he wrote on Forbes a while back: “Today, when top management is surveyed, their priorities in order are: finance, sales, production, management, legal and people. Missing from the list: marketing and innovation.”

So, why are these two key functions at the lower end of the priority list? Perhaps, there is a lack of comprehension about the real meaning of marketing and innovation and the nature of management activities that are necessary to drive and manage these two functions.

Marketing and Innovation are the only things that can sustain a company’s continued growth. There are countless examples of companies who could not see opportunities beyond their noses. The Big 3 auto makers in the US ignored innovation and marketing, resulting in increased market share for Japanese car makers. Microsoft ignored innovation and efficient marketing allowing a competitor like Firefox to enter and grab browser share. Xerox’s Palo Alto Research Center were innovative but failed to market (or failed to exploit many of the technologies they developed)  many technologies now in use by Apple and others.

Fundamentally, marketing and innovation is a philosophy of doing business. It about developing a mindset or a way of thinking that searches for external opportunities and develops an outside-in orientation. All other business functions such as finance, production and distribution, customer services, R&D etc support these two disciplines. Marketing is not just advertising and promotion – it means bringing market focus into business decision making.

Innovation is not just exploiting technology for marketable products, it is also about changing the internal processes of an organization to serve customers better and to create sustainable competitive advantage. The need is not to grow bigger but to grow better.

Innovation is a constant in technology as well as business. But not all innovations are the same. Most innovations can be divided into two broad categories: an evolutionary change (e.g., from the phonograph record to the cassette tape) or a discontinuous innovation (e.g., from the cassette tape to the iPod). Discontinuous innovations are new products or services that require a combination of the end-user and the marketplace to effect a dramatic change in past behavior, with the promise of gaining equally dramatic new benefits.

Innovation bring out the ‘New’ or ‘Better’. Marketing commercializes it. Both of them work hand-in-hand. A caveat however, both these disciplines are philosophies that need to be intrinsic to the workings of an organization to succeed. Which means that they need to be fostered from the top.

The word-of-mouth (WOM) effect is something that makes me feel the same way. Jack Trout, some years ago, wrote an article on WOM in Forbes about how this word-of-mouth marketing phenomenon is getting out of hand.

He wrote about how things were getting a little out of hand because there was a Word-of-Mouth Marketing Association called WOMMA. And lots of noise was made about this.

Funnily, he also mentioned the different names of WOM marketing: buzz marketing, viral marketing, community marketing, grassroots marketing, evangelist marketing, product seeding, influencer marketing, cause marketing, conversation creation, brand blogging and referral programs.

He debunks the newness of the concept and states that the parallel, back in the day, was early adopters. It sounds simple enough to me. Within a typical product life cycle, early adopters accept a product and propagate its benefits to people within their social circles and as a results, more people try it enough to get the product to move into the growth phase of its life cycle. No such scientific basis exists for WOM marketing.

As Mr. Trout says, today, people have many more ways to communicate. With digital communications, online chatter far surpasses the direct person-to-person communication, with the exception of clearly knowing the person with whom you are chatting. the problem is that too much ease of communication has led to conversations en masse with the result that noise levels have been raised  to mind boggling levels. Mr. Trout likes that.

But, he asks a sensible question. How many people really want to chat about a product? In online forums, especially the popular ones like Facebook and Twitter, how many people talk about mass marketed products like toothpaste or toilet paper? And, if the product’s a luxury product like the Audi TT, fewer people chat about them as they want to be seen driving up in one. He does give some allowances to specialty clubs like Harley Davidson motorcycle and states that members of those clubs talk about those specialized products only. They don’t need buzz. I would add that today some brands have clubs build around them but, it’s more from a ‘servicing’ standpoint rather than trying to penetrate a market with a new product. Think JetBlue or H&R Block on Twitter or Whole Foods on both Twitter and Facebook. There are also communities centered around religion like Catholic Relief Services or even automobiles like the Ford page on Facebook. But, I seriously doubt if any of these companies have a serious social media strategy on how to use their fan bases to increase sales.

Mr. Trout speaks about the  Segway scooter and the negative buzz it received. “Funny looking or dangerous on sidewalks” is not what you want to hear. He rightly states that negative buzz can kill off a product if it is not the right one. The Pontiac G6 giveaway on Oprah got a lot of buzz but sales never really took off. The product lacked intrinsic characteristics like trust, faith, reliability & quality -  a problem that most American auto brands face except Ford, who upped their game. Sometimes, buzz can be positive though, like the buzz on Google’s Chrome bowser (see graphic) or even Google Buzz. In any case, Mr. Trout’s super advice on this one: You’ve got to have a product or service people want to talk about in a positive way, and there aren’t many of these around.

Jack Trout continues on the bad part of WOM marketing. There’s no way to control that word-of-mouth. Does a brand manager really want to give up control of the promotional piece of the marketing mix and and let consumers take over? In the WOM sphere, all people do is talk. Hopefully, they’ll talk positively about your product. But, they;re not a product manager who is responsible for getting product sold. If someone develops a positioning strategy for their product, he/she wants to see that message delivered. Buzz, as he says, will get you social mentions. Nothing more. Nobody will check in with the brand manager in advance on what to say.

In conclusion, WOM marketing is just another piece of an overall marketing strategy. If the social media piece of your strategy is complemented by essential marketing elements like TV ad campaigns, radio campaigns, DM, PPC, email marketing, POS promotions, then it can be more successful in helping you achieve your product penetration goals.  Otherwise, it will just be ‘conversations’ that you can put a dollar value to and look stupid when asked to explain it.

But, sometimes, it does make sense to hold back and actually not increase your market share. Here are the reasons why…

1. If the firm is NOT ready:

If the firm is near its production capacity, an increase in market share might necessitate investment in additional capacity as it will have to meed the additional demand for its products. The big problem is that it poses many capital budgeting questions that the firm might not be in a position to answer. For e.g. how much capacity needs to be present? how much is enough, too much? These are questions that need to be answered after careful analysis. If a company suddenly realized that it’s running out of product in the marketplace, typically it scrambles to meet demand by tolling i.e. using another firm’s underutilized manufacturing capacity to meet demand and at the same time, it thinks about how it can ramp up its efforts at optimal cost.  In the end, if the expansion in capacity leads to a situation where the newer capacity is underutilized, higher costs will result.

2. If the firm grabs market share too aggressively:

There’s the right way to increase market share and that’s called customer pull-through. And, there’s the wrong way to increase share and that’s called product push-through. If a company increases their promotional budget too aggressively and decreases its prices too aggressively, needless to say, the bump in product revenue might not be enough to keep EBIT in line with growth levels since the increased marketing spend might more than take the advantage of increased sales away. So, with EBIT in decline, any increase in market share as a result of increasing promotional expenditures or by decreasing prices is a zero-sum game. Comcast spends so much money to aggressively grab market share from Verizon but despite the increased spend, the marginal increase in share hasn’t resulted in high profits.

3. If all firms in the marketplace engage in a price war:

The most amateur of all moves. In a price war, only the customer benefits. All the firms engaging in this tactic lose heavily. A market share grab using a tactic like this is just plain idiotic. Customers buy your product not just based on price but on the other tangible and intangible features that your product possesses. but, marketers to meet short-term goals forget this basic tenet of marketing and engage in an all-out unnecessary price war which erodes profits.

4. If an upstart firm captures market share:

If a firm’s a brand new upstart firm, any market share it captures is at the expense of the market leader which means that it highly possible to wake up a sleeping giant. If that happens, this market leader can reach into its war chest and cause promotional havoc on the upstart. If a  small niche player captures only a small share of the market, it’s usually tolerated. However, if that share increases, a larger, more capable competitor may decide to enter the niche and the David Vs. Goliath scenario unfolds. In today’s world, unlike biblical times, very few upstart firms possess the marketing equivalent of a sling-and-stone to stun the market leader and grab more share though one might argue that if an upstart uses digital marketing channels like a website, SEO, SMO, social media, videos etc, it could effectively get the jump on the market leader on the Internet.

5. If the firm dominates the market:

Microsoft knows this lesson. Antitrust issues are always plaguing the company in all the markets in which it operates. While the company is still the overwhelming market leader in the desktop operating system market, it still has to use valuable time and resources to address antitrust concerns.

6. If the firm’s customers are unprofitable:

The applies more to B2B firms that B2C. If a company has low margins from a segment of customers it sells to or services, it should cut its losses. In this case while it might lose market share, the upside is that its profit margins increase.

Estelle Metayer is one of these people. Her insights and advanced thinking into marketing and competitor intelligence are very potent. But, her ability to translate these concepts into day-to-day actionable changes is what makes her such a powerful communicator. Gosh, maybe I’m in love!

In any case, here’s a two part adaptation of her article on how to calculate market share. To say that, this helped me immensely is an understatement.

Have you ever been in a situation where your competitor claimed a market share that was not even close to the calculations you gave to your senior management? Or where different people in the organization were using different numbers? Where annual reports claimed market shares you could not retrace in your calculations? Understanding how you can calculate – and use – market shares can be extremely useful.

This article will discuss some of the techniques you could apply when dealing with market share calculations:

• Why is an appropriate calculation of market share so important?
• Defining your market share according to your objectives;
• Market share calculations and pitfalls to avoid;
• How to calculate a market share when there is no data available.

Why is an appropriate calculation of market share so important?

As a marketing manager at Starbucks described in an excellent article about market share in the retail world, the underlying themes typically include any, or all, of the following:

Market potential – “How many dollars are there in this market for my concept?”

Market share – “How much of the potential in the market do I capture?”

Market opportunity – “Which markets offer the greatest opportunity for growth?” But market-share calculations can also serve other purposes. They can be used to:

Challenge common wisdom : One of my clients at an electronic firm consistently claimed his company owned 80% of the world market in its segment. However, we soon noticed that the accounting team, which was responsible for maintaining the market share calculations up to date, used the following method to arrive at their calculations:

Number of contracts won / number of contracts pursued

Because the company was only pursuing half of the total contracts available, this measure did not portray an appropriate picture of reality – which was that the company really owned less than 50% of the total market.

Avoid blind spots and avoid overlooking substitutes: Imagine yourself as the marketing manager for Coca-Cola. What is your market share? Roughly 60% of the world market versus Pepsi? Not really. Management at Coca-Cola does not only include the direct competitors into their market share (Pepsi), they can also include soft drinks (Sprite, fruit juices, etc.) or even any Food & Beverage product destined to cool down a dry throat. For example, they can include ice cream. This method allows a company to include alternative products/lifestyles to avoid a blind spot – a new trend or product arriving in the market, such as the increase of consumption of smoothies, that would not be tracked otherwise.

Similarly, do manufacturers of corn flakes compete only against one another? Or do they also compete against makers of other ready-to-eat cereal? What about hot cereal? What about bacon and eggs?

To present a common sheet to work from: In many companies, there are a variety of market-share calculations. Accounting calculates the market share based on revenues; the marketing department uses the number of products sold; the strategic-planning department looks at the broad picture, etc. As you can easily imagine, working from the same set of numbers is useful. It will also avoid confusion and contradictory messages (annual reports, discussions with journalists, etc.)

Defining your market share according to your objectives
In fact, market-share calculations are often “twisted” to serve political or public relations purposes. Here are some examples:

Market-share calculations and pitfalls to avoid

The calculation seems easy:
Products or services sold (A) / Market size (B)
However, here are some of the questions you can ask yourself:

A: Products and services sold

• Do I calculate in dollars or units?
• Do you take into account booked orders or delivered orders?
• If I calculate in dollars (or any other currency – pardon my Canadian biases), do I compare real dollars year to year or do I adjust with inflation?
• How do I incorporate sales from subsidiaries?

B: Market size

• How do I define my market? As Ben Bidwell, who headed marketing at Ford Motor Co., once said, “Define your market, don’t let it define you.”
• Do I include all countries, or only the ones where I am active?
• Do I include taxes?
• Do I include the service component?

How to obtain market share when there is no data available Bottom-up:

• Track the number of units sold and the number of contracts awarded through press releases and articles;
• Create a database (Excel works well usually) to add them up;
• Assuming that one is never able to track all contracts awarded, extrapolate using what you know of the total market size

When does it work best? When your company is active in a market where large contracts are awarded (defense, energy systems, transportation projects, etc.)

Players revenues:

• Gather information from annual reports and company information about the total revenue in a particular market;
• Add revenues from main players;
• Extrapolate for smaller players based on number of employees, or estimate of revenues

When does it work best? When there are few players: the aerospace industry, for example (the size of the aircraft market can easily be obtained by looking at Boeing and Airbus and a handful of other companies).

Demographics
If your product is a consumer good:

• Go back to statistics and demographics;
• Assume a penetration percentage;
• Calculate volume in units;
• Apply price/cost per unit.

One can turn to readily available geo-demographic data from vendors like Claritas, CACI, and Applied Geographic Solutions. For a few industries, the questions are answered through systematically obtained consumer data. IRI, ACNielsen, and others provide scanner-based purchase data. Companies like NPD and MRI provide consumer survey data. Other companies, such as IXI, provide market share and account data for specific industries (in IXI’s case, the financial services industry). With few exceptions, however, the data are not generally available at low levels of geography.

When does it work best? For consumer products.

Similar market

• Select a similar market to yours (in size or in behavior);
• Extrapolate from a market you know well, or where more information is available;
• Adapt the number obtained for particularities of the market;
• Use as an estimate of market size, and not a precise number.

When does it work best? When the market is comparable. For example, to understand the size of a Canadian market, use US market and divide by 10 to get a “back-of-the-envelop” average.

Linked to another market
Use the numbers from the larger market to derive size of the current one. The market you pick will have to be directly proportional to the one you are analyzing.

When does it work best? When both markets are directly proportional to each other: for example, the size of the car seat market is closely linked to the size of the car market.

Conclusion
By now, you have understood how misleading a market-share calculation can be, and how companies can easily manipulate them. In order for you to use them effectively, you should also write down your assumptions and make sure you compare “apples with apples.” As a result, always beware of market-research reports which often lack explanations of how the market calculation was done. In fact, you should almost always pick up the phone and talk to the person who originated the calculation, to check his/her assumptions.

About the Author
Estelle Métayer is president of Competia. Competia is North America ‘s leading consultancy and training organization for senior executives and analysts in Strategic Planning and Competitive Intelligence. A former consultant at the international strategic consulting firm McKinsey & Company, Estelle has written and lectured widely on the process involved in turning the intelligence gained into actions.