We all know the idea of market share. You define what you see as the total market for a particular product or service and then identify who gets which part of the pie. To calculate it, you first define how many units are sold or how many euros, dollars, or other type of currency are spent in total in a particular market. Then you look how many units you and your competitors sell or what your or their revenues are and divide this number by the first. There are some more advanced variations such as the total addressable market (TAM), serviceable addressable market (SAM) and serviceable obtainable market (SOM), but the overall idea stays the same.
Market share has been a widely used indicator of a company’s success for a very long time. In the 1960s and 1970s strategy was all about market share. The main road to success was simple: become the biggest and win. This was the time when the growth matrices of the big consulting firms where developed and extremely popular: the BCG matrix (with its cash cows, dogs, stars and question marks) and the GE-McKinsey Matrix. Even though market share is not so dominant anymore today as an indicator of success and a goal to strive for, it is still widely used.
Of course, looking at market share makes sense. It gives you an idea about how well you do compared to your main competitors. With all its limitations, it is still a pretty useful indicator, especially because of its comparative nature: it tells you something about how you perform within your industry compared to others. If size or growth doesn’t concern you, this is not so relevant, but if you want to be a bit of a serious player in the market, it is.
The main problem with market share is that is backward looking. It tells you how well you do today because of what you did in the past. It is a result, a ‘lagging’ indicator that hardly gives you any information about the future. Of course you could make simple assumptions and say that your market share in the next couple of years should grow, stay stable or decline. But based on what information? Why would you project such change – other than wishful thinking or simply stating it as a goal?
That is where the idea of value share comes in. Your value share indicates which part of the total value that you could possibly offer to customers you are actually offering. It tells you how well your offering (product or service) aligns with what your customers need in comparison to your competitors’ offerings. If your offering matches customer needs better than your competitors’ offerings you have a high value share. And if your competitors’ offerings are better aligned with customer needs than yours, you’re ending up with a lower value share then them.
Why is it important to know your value share? Because it gives you an idea of how market shares can be expected to develop in the future. Your value share tells you something about how much value your offering creates for the customer compared to the competition. If we assume a ‘perfect’ market as economists call it, it can be expected that the product that best fulfils customer needs will win. After all, in a perfect market supply and demand will always find each other and match.
Of course, no real market is perfect, but the degree to which your offering matches customer needs compared to other offerings is an important predictor of future sales. This means that your value share is more forward looking than market share. It tells you something about whose market share can be expected to grow and whose market share can be expected to decline. While the accuracy of such predictions will depend on a great many of factors, value share thus has some predictive value.
Calculating your value share is not as straightforward as calculating your market share. But it can be done and isn’t that hard either. First and foremost, it requires a systematic and standardized scale to measure value creation. With such scale we can measure customer needs, We can measure, for example, how much weight they put on quality compared to price, and so on. Using the same scale, we can also measure the value our offering creates and those of competitors. In this way we can score the various offerings in the market and see how well they are aligned with customer needs. And with this information we can calculate everyone’s value share.
In my next post I will explain in more detail how to calculate your value share. If you have read earlier blogs, you probably have an idea now how it works. As we will see, the four dimensions of value creation (Price, Quality, Delivery and Flexibility) are a key ingredient, as well as the process of market alignment.