Dear Industry: Focus on Profit Share Not Market Share

on May 4, 2012

The interest in the tech media world around market share is fascinating. Each quarter reports come out, for the quarter only, pointing out different vendor and software platform market share for things like tablets and smartphones. As interesting as it is to look at market share of hardware and software platforms, it is more interesting and relevant to look at profit share–a metric I think is more important.

Apple is perhaps the best example in this metric as a recent statistic points out. Asymco shared that in the smartphone segment Apple obtained 73% of operating profits, Samsung 26% and HTC 1% while everyone else lost money. Apple continually captures significant profit share of the markets they compete in, and to Apple profit share is more important than market share.

A common thread of thought in the tech industry, which I believe seriously lacks perspective, is that industry history will repeat itself to the degree that a platform will have the majority share of a market for a long period of time. What I truly believe many are waiting for or looking to happen is for the “open platform” like Google or Windows will rise to dominate the market since open should always win–a premise I reject. If anything I would place my bet on the closed system in a pure mature consumer market.

In my last Dear Industry column I pointed out many reasons why I don’t believe history will repeat itself. My whole argument is based on other consumer goods in other mature markets where there is simply not a dominant market share leader. Again this is true because consumer preference drives segmentation in mature markets.

If you look at other companies in mature or post mature markets like consumer goods or automobiles, you find that each of them focus more on operating efficiency in order to maximize profit share. Of course they would love to see their market share increase dramatically but in post mature markets consumers are driven by personal preferences. Consumers driven by personal preference know what they want and why they want it. Because of preference driven choices, market share shifts simply don’t happen often due to preferences being established. Think Coke and Pepsi, or Mercedes and BMW, or Nike and Adidas.

There are, of course, a number of differences between the computing market and consumer goods. But there is something about consumer markets that I think is interesting that may shed light on how to focus on profit share over market share.

A Deeper Look at Consumer Preference

What is interesting about consumer preference is that it is largely subjective. Although their preferences become refined over time that refinement often comes from subjective perceptions rather than objective ones.

To what extent subjective refinements around personal preference take place over time as consumers shop for computing products is yet to be determined. However, as the market for products like smartphones and tablets matures; I have a hunch that many early perceptions and experiences happening currently with technology products will shape future consumer preference.

On that point, a common foundation shaping consumer preference is the experience they have with a brand, product, or service. If consumers have a poor experience with a brand, product, or service, it becomes increasingly difficult to win them back. The importance of first impressions with consumers can not be overstated.

Understanding consumer preference is a key to understanding how to focus on profit share.

Create Features of Value

The second key point to drive better profit share is to focus on creating features consumer segments find valuable. If you look at any mature product strategy striving for profit share you find that the strategy is to maintain price but layer on features with each new product generation.

The key to that specific product strategy within a segment is to identify value and anticipate future value through research and development. Companies that do that well continually introduce new features that the market segments they are focusing on find valuable. Creating features of value is one of the better strategies to maintain a desired price within a segment and to avoid a race to the bottom.

Specifically in regards to the computing segment it is important to create products that do things better than other products on the market. Right now I am seeing a number of smartphone vendors start do this around the camera. The HTC One X for example is touting several features specific to the camera that is differentiated from the pack. For this strategy to work a “better” camera needs to be perceived as a feature of value that is important enough to sway consumers.

In an increasingly segmenting market feature centric products and product experiences are key to sustainable differentiation. When this strategy is employed it creates a better foundation to focus more on profit share of a specific segment.

Of course operating efficiency is key as well to drive better profit share. But both of the above points of understanding consumer markets and focusing on creating valuable products and experiences will shape operating decisions all the way down to the supply chain.

A strong argument can be made that by focusing on profit share by creating valuable features and experiences could lead to better market share. My overall point is that the right way to approach strategic product and roadmap decisions is to focus more on strategies that drive profit rather than market share.

Companies that employ a market share only strategy run the risk of gaining no market share and making no money.