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Studies

by Mike Masnick


Filed Under:
competition, market share



Debunking The Debunking Of The Market Share Myth

from the depends-on-what-you're-doing dept

Since so much of the economics we focus on around here look at the value of complementary goods to boost other markets, it caught my eye to see a former Forrester technology analyst, Carl Howe, claiming that using loss leaders to help grow another business has officially been debunked, and then using that claim to explain why Apple has been so successful lately. According to Howe, it's because the company focuses on profit first, rather than trying to build marketshare through the use of loss leaders. That struck me as odd, because a huge part of Apple's recent success has been its recognition of the importance of complementary goods and its ability to use music as a loss leader for its other products. This also comes just as we were pointing out how much of Google's success is also based on its recognition of the importance of complementary goods in building its own dominant position.

Howe points out one example from the report, supposedly showing that while Microsoft and Sony beat each other up fighting for marketshare in the gaming console space, Nintendo won by focusing on how it could profit from the Wii. That's somewhat misleading, and helps show why Howe is wrong in claiming that the focus on marketshare isn't important. In fact, half the problem that Sony has faced with the PS3 was that it was too focused on profit rather than marketshare initially. That is, it priced the PS3 way too high, trying to cover more of its costs, making it quite difficult for most people to afford it. The Wii's success had less to do with a focus on profit and much more to do with a focus on growing the overall market by expanding it into a new realm, attracting a different type of game console buyer.

It's that last point that's the key. An effective use of complementary goods isn't to take marketshare in a stagnant market (which is what the study Howe points to shows), but in using it to expand a market into new areas. That's what Apple has done. It's what Google has done and it's what Nintendo has done. That doesn't damn the use of loss leaders or complementary goods. Far from it. It shows how you absolutely should be using them to help expand primary markets for other goods allowing you to not only gain marketshare, but also profits. Howe acts as if the fight for marketshare and for profits are mutually exclusive. It certainly is true that focusing on marketshare exclusively doesn't make sense, but giving up some profits to focus on growing a market and taking marketshare in that new realm isn't just perfectly reasonable, it's the story behind many of the greatest business successes of all time.

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  1. icon
    Mike (profile), 27 Dec 2007 @ 2:40pm

    Re: Not convinced

    Hi Carl,

    Thanks for stopping by to comment.

    I'm the author of the article you referenced. I just wanted to point out that I'm not a Forrester analyst any more, nor have I been for the last five years.

    Yes, I know. That's why I wrote "former Forrester analyst."

    Also, I disagree with your point about Apple using music as a loss leader. To my knowledge, Apple has never lost money on music sales -- even back in 2002, the $0.99 per song price was established so that music would be sold at a gross profit of about $0.24 a song. Net profit to Apple was estimated at that time to be something around $0.10 a song,

    The point about it being a loss leader is sourced directly from Steve Jobs (follow the links). Here's what he said: "We would like to break even/make a little bit of money but it's not a money maker."

    Even if it's not a complete "loss" leader, it is clear that it has little to do with Apple's strategy, which is to sell hugely profitable devices. The music just helps make that possible.

    so I still claim they are an example of a company chasing profit, not market share.

    I'm still confused as to how these are mutually exclusive goals? In fact, I'd argue that Apple is very much chasing marketshare and profit simultaneously -- and they did so (as described in the post) by basically reinventing the category of digital music players, expanding that market greatly. That was very much a marketshare move. It's just that they did so in a way that also allowed them to profit. If Apple was merely seeking profit, it would have created a system that was somewhat better than what was out there already, not redefining the entire market, as it did.

    Your point about expanding markets is an interesting one, but I don't think it necessarily requires the use of loss leaders.

    Nor did I mean to imply that loss leaders are "required." However, I'd argue (and actually have argued) that the more you understand complementary goods, the more you realize that almost *every* good has some kind of loss leader component to it.

    Nintendo is a great example: it has cleaned both Microsoft's and Sony's clocks in gaming by expanding the market and never used loss-leading products to do so. It is also the most profitable gaming company in the industry. So tell me again why loss leader products to gain market share is a good strategy?

    Nintendo redefined the market, and did so in a profitable way, but I'd argue that it had little to do with the focus on "profit" and much more to do with the focus on redefining the market by making a different type of game that was fun in different ways and for different audiences. I never said that it required a loss leader, but it is about recognizing the importance of complementary goods in the form of a more family oriented gaming system.

    I think part of the disagreement is that you're too focused on the question of "loss leaders," which are actually quite valuable marketing tools in many different industries (especially the technology field). I don't care so much whether or not something is specifically a "loss leader," but the value of complementary goods, whether at a loss or a profit are huge important in driving new product innovations.

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