The Market Share Myth

Business Pundit posts on "The Market Share Myth." As he he says, a large number of business plans fall into this trap.

It's not just unsophisticated would-be entrepreneurs who get caught. Many of the dot-bombs fell for a more "sophisticated" version of the fallacy. They would take a p-SWAG projection (that is a pseudo-Scientific Wild Ass Guess dressed up with lots of spreadsheets) and then count their money. As in, "the on-line market for cyber widgets and digital wadgets will be at least $75 billion by 2005. By gaining only 2% of the market our revenues will be $1.5 billion."

OTOH, market share projections can be useful, especially as reality checks on planning assumptions. For instance, say you are about to enter a new market where the largest competitor has a 15% share. Your analysis shows that your break-even point is a share of 10%. That should set off alarms. You have to ask how you are going to displace so many established firms to become a major player. It is going to take a compelling price and value proposition in a market where you have little experience. Moreover, your attempt to displace existing firms is likely to provoke a competitive response: price cuts, increased marketing effort, etc. These will undercut your existing assumptions about profitability.

Back in 1999, when the Internet frenzy was at full cry, Steven Rosner of LEK Consulting looked market valuations in light of implicit market share assumptions. He found, for example, that Ebay need to attract auction volume equal to 3% of total GDP by 2013. Yahoo made sense only if its advertising revenue hit $113 billion, yet projections for total on-line advertising were only $44 billion by 2013. Amazon need to reach revenue of $100 billion in a period when the total book/music marketplace was expected to grow to only $85 billion. It was a useful analysis which kept my 401(k) away from tech stocks. And, i would argue, events have shown he was right.