To The Moon

Market Share—a Key to Profitability

by Robert D. Buzzell, Bradley T. Gale, and Ralph G.M. Sultan

The March–April 1974 issue of HBR carried an article that reported on Phases I and II of a project sponsored by the Marketing Science Institute and the Harvard Business School. The basic purpose of the project is to determine the profit impact of market strategies (PIMS). The earlier article established a link between strategic planning and profit performance; here, with additional data, the authors come up with a positive correlation between market share and ROI. The authors discuss why market share is profitable, listing economies of scale, market power, and quality of management as possible explanations; then, using the PIMS data base, they show how market share is related to ROI. Specifically, as market share increases, a business is likely to have a higher profit margin, a declining purchases-to-sales ratio, a decline in marketing costs as a percentage of sales, higher quality, and higher priced products. Data also indicate that the advantages of large market share are greatest for businesses selling products that are purchased infrequently by a fragmented customer group. The authors also analyze the strategic implications of the market-share/ROI relationship. They conclude by advising companies to analyze their own positions in order to achieve the best balance of costs and benefits of the different strategies.

It is now widely recognized that one of the main determinants of business profitability is market share. Under most circumstances, enterprises that have achieved a high share of the markets they serve are considerably more profitable than their smaller-share rivals. This connection between market share and profitability has been recognized by corporate executives and consultants, and it is clearly demonstrated in the results of a project undertaken by the Marketing Science Institute on the Profit Impact of Market Strategies (PIMS). The PIMS project, on which we have been working since late 1971,1 is aimed at identifying and measuring the major determinants of return on investment (ROI) in individual businesses. Phase II of the PIMS project, completed in late 1973, reveals 37 key profit influences, of which one of the most important is market share.

There is no doubt that market share and return on investment are strongly related. Exhibit I shows average pretax ROI figures for groups of businesses in the PIMS project that have successively increasing shares of their markets. (For an explanation of how businesses, markets, and ROI results are defined and measured in the PIMS project, see the sidebar.) On the average, a difference of 10 percentage points in market share is accompanied by a difference of about 5 points in pretax ROI.