Market Share and Profitability

Product & Brand ManagementSzymanski, D.; Bharadwaj, S.; Varadarajan, P. · 1993Journal of Marketing

Topicsmarket share·profitability·meta-analysis·pims·market share elasticity·omitted variable bias·strategy

Imagine your brand team asks you to fund a line extension meant to gain market share for a packaged-goods brand. Its business case treats higher share as a direct route to higher profitability and ignores firm-specific intangible factors, such as management skill and luck. What should the case show before you fund it?

Higher market share goes with higher profitability, but the measured link shrinks once firm-specific intangible factors are counted.

Data chart

The measured link is smaller when profit models include firm-specific intangible factors

Average reported coefficient for the market share-profitability link, weighted by sample size. A higher positive coefficient means a stronger positive association on the reported study scales.

Including firm-specific intangible factors reduces the measured link.

Profit models that include firm-specific intangible factors report a smaller market share-profitability link.

Table 3, p. 11: means weighted by sample size, exact values .313 for 256 omitted-factor estimates and .114 for 20 included-factor estimates. Both averages remain positive. The adjusted model holds other study differences constant and finds the link tends toward zero when intangibles are included (pp. 12 and 14); its omission shift is +.352 (Table 4, p. 13). In some cited studies, intangible factors were measured using the prior period's return on investment; the proxy's validity remains uncertain (pp. 8 and 15). Absolute share is expressed as a percentage; relative share is a ratio to rivals (pp. 2 and 10). These pooled coefficients mix both scales and have no universal conversion to a profit change.

Data chart

The business sample changes the market share-profitability benchmark

Average reported coefficient for the market share-profitability link, weighted by sample size. A higher positive coefficient means a stronger positive association on the reported study scales.

The Profit Impact of Market Strategy database gives a higher benchmark.

Market share-profitability estimates from the Profit Impact of Market Strategy database run higher than estimates from other business samples.

Table 3, p. 11: means weighted by sample size, exact values .174 for 142 estimates from other samples and .286 for 134 database estimates. The descriptive gap is .112; the adjusted gap, after accounting for other study differences, is +.287 (Table 4, p. 13). The lower descriptive mean remains positive. Absolute share is expressed as a percentage; relative share is a ratio to rivals (pp. 2 and 10). These pooled coefficients mix both scales and have no universal conversion to a profit change.

Action guide

Approve funding only on a profit case that counts intangible factors.The team must treat the share-profit link as an association, not a cause. Leaving out firm-specific intangible factors inflates the estimated link more than any other omission.
Set requirements for profit models of market share.Require your analysts to use a regression model of profit that accounts for firm-specific intangible factors, sales force spending, product or service quality, product line breadth and market growth.
Check a benchmark's business sample before you set profitability expectations.Ask your team whether the benchmark draws on the Profit Impact of Market Strategy database or pools consumer and industrial businesses. After accounting for other differences between studies, the database yields higher benchmarks than other samples, and pooling yields higher benchmarks than industrial businesses alone.
Match profit measures and time periods before comparing benchmarks.Ask your team to compare only estimates that use the same profit definition and time periods, because both choices change the estimated link after accounting for other differences between studies.

Evidence

Across 276 estimates, higher market share goes with higher profitability on average.
Once firm-specific intangible factors are counted, the link almost disappears on average, after accounting for other differences between studies.
Estimates from the Profit Impact of Market Strategy database run higher than those from other business samples. After accounting for other differences between studies, pooling consumer and industrial businesses also inflates the estimate compared with industrial businesses alone.
Regression models of profit give different estimates when they leave out five of the 11 factors examined. The five are firm-specific intangible factors, sales force spending, product or service quality, product line breadth and market growth.
After accounting for other differences between studies, the link is smaller when profit is measured relative to sales rather than investment, or when market share covers one year rather than a four-year average. It is larger when profit is measured over one year rather than four.

Key takeaway

The link between market share and profitability shrinks once firm-specific intangible factors are counted.

Limitations

The studies cover mostly large businesses through 1991, in countries the paper does not name, and do not show that gaining share causes higher profitability. Some cited studies measure intangible factors by last period's return on investment, a proxy whose validity is uncertain.

Source

Szymanski, D., Bharadwaj, S., & Varadarajan, P. (1993). An Analysis of the Market Share-Profitability Relationship. Journal of Marketing, 57(3), 1-18. [Published paper](https://doi.org/10.1177/002224299305700301).

Exact values behind the rounded figures: .313 with intangible factors omitted and .114 with them included; .174 for other business samples and .286 for the Profit Impact of Market Strategy database.