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.

Filed Under: competition, market share

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  1. identicon
    Ajax 4Hire, 27 Dec 2007 @ 7:31am

    so funny!, Internet web pages are loss leaders

    Web pages are free to the user.

    The web page leads users to places where they can spend money.
    It is not advertising in the old world sense in that many sites provide services, information, news, entertainment, search results and that leads the user to opportunities to spend money.

    Web Sites are the perfect example of loss leaders.

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