In my last post, I touched on the importance of being in first or second place in your market. It makes sense at a basic level, after all, the higher your market share, the more products or services you sell. Thought leaders agree. Authors like Al Ries and Jack Trout repeat it time and time again. Jack Welch held this concept as gospel and insisted that business units in GE’s portfolio had to be first or second in the market, or else they would be dismantled. It all seems pretty cut and dried, right?
The problem is, unless you’re launching a product in an entirely new category, you’re unlikely to ever start in first or second place. Does this mean that you’re out of luck? The answer, as in most marketing discussions, is “it depends”. If you’re coming into the cola market, for example, you’re problem out of luck. You may be able to make some money as niche product or private label, but you’ll be competing on costs and enjoy slim margins. If the market isn’t so neatly settled, then you’ve got a chance to make your mark, especially if you can leverage equity from an adjoining sector. For example, when Barnes and Noble announced its upcoming e-reader, people listened. People may know Amazon’s Kindle well (and therefore recognize its positioning), but the numerous smaller name readers haven’t made as much of a dent in the market or the customer’s mind share.
What is the critical difference between the soft drink and e-book examples? In the first, there are already two competitors that dominate market share (Coke and Pepsi account for about 75% of the soft drink market), whereas this is not the case in the e-book market. To throw some jargon around, the soft drink market is more stable than the e-book reader market.
Stable markets are not defined by specific market share values, but by the ratio of market share of competitors. In other words, it’s not as important to be big as it is to be bigger than the next guy. (It’s like the adage that you don’t have to be faster than the bear, you just have to be faster than the guy next to you.) Theoretical stable market structures have been historically defined by size ratios of 0.5 to 0.6. A 0.5 size ratio, for example, means that the second place product (market challenger) has half the share of the first place product (market leader), the third place product (market follower) has half the market share of the second place product, and the remaining share is made up of niche products. This arrangement is best known as the Boston Consulting Group’s “Rule of Three and Four” and describes a market whose leading competitors have market shares of 50%, 25, and 13%, respectively.
The soft drink market has a size ratio of about 0.6: Coca-Cola has about 40% of the market, Pepsi has about 30%, and Cadbury-Schweppes has about 20%. I haven’t been able to find e-book reader market share data, my my guess is that the distribution is not so neat (i.e., mathematically semi-logarithmic). While Amazon’s Kindle is in the public eye, why do we hear so little about Sony’s reader? Judging from the amount of talk, the positioning is not there, and so market share is likely fleeting.
So, what does this mean to you? Understanding what arrangements of market shares are more malleable gives the market entrant an gauge of how successful he or she can be. If the existing players haven’t settled in in the consumers’ pantries, they probably haven’t settled into the consumers’ minds. Market share data isn’t that hard to come by, especially if you’re willing to spend a few dollars on it, and it’s a good first step in your research.