Ah, the curves of Isomarketshare!

Sound decision-making in business is based upon a correct understanding of facts relating to the decision one has to make.

It is therefore surprising how – oftentimes – businesses can lack in sophistication when assessing drivers of performance.  I do not wish to generalise excessively, however in my experience there are often instances in which a bit more thoroughness and curiosity about data and facts can lead to interesting insights.

Maybe one of the reasons why Crescendo Partners has been relatively successful as a consulting firm is indeed that despite our small size and reach we have developed a culture of fact-based analysis that goes beyond the obvious; we routinely use some tools that can help us look at business reality from a different perspective.

One of such tools is a simple analysis of Market Share to distinguish its fundamental drivers.  I should note that this analytical tool only works when a company has a finite number of customers, for example: hospitals for a pharmaceutical company, dealers for a manufacturer of plumbing products, supermarkets for an FMCG distributor.  Whenever the universe of customers is too large (like in B2C) or too small (like in some industrial arenas) then the following framework is of limited utility.

At the core of the framework, there is a simple mathematical equation, recognising that Market Share is the product of two factors: Coverage and Winning Ratio.

Coverage is the percentage of potential customers a company actually has a commercial relationship with.  Winning ratio (sometimes known also has share of wallet) is the percentage of business we have of each specific customer.

As a formula MS = C * WR (market share equals coverage times winning ratio).

Let’s explain with an example.  A company (A) sells a product which is sold only in 100 stores around a country.  The company has only one competitor (B).

Say that A has a 50% market share.  Well it can achieve it in two ways:

– It can sell to all the stores but have a winning ratio of 50% in each store (B would have the remaining 50%)  OR

– It can only sell to 50% of the stores but represents the entire sales of that store (a winning ratio of 100%)

so 50% MS =  100% Coverage * 50% winning ratio

But also 50% MS = 50% Coverage * 100% winning ratio.

And also  20%MS=80%C * 25%W=40%C*50%WR and so on.

The basic equation MS = C*WR can obviously be also expressed as WR=MS/C which is a hyperbole allowing us to draw curves of isomarket share.  The figure below should be self-explanatory:

Why is this concept important?  Firstly, because it allows us to rapidly understand what drives our market share position.  It also compares it visually to that of others. Let’s take an example of two companies (AAA and BBB) both with a 15% market share, as illustrated it the diagram below.

The two companies might enjoy the same market share.   However, in my view and experience, company AAA is in a much stronger position.  Its market share is driven more by winning ratio than by coverage.  Except in a highly regulated industry, coverage is also cheaper to “buy” and grow into than winning ratio.

Coverage is driven by size of sales force, investment in distribution, advertising, product availability and often just longer time in market.  Winning ratio is driven instead by a fundamental preference of customers for one product over another.

In the graph, growth in market share happens when “moving up and to the right”.  Movements “up” (winning ratio) are much harder typically than movement to the “right” (coverage).  I would predict that with an investment in distribution company AAA will soon have an aggregate share higher than company BBB.

The same concept obviously can be used to compare across different entities and geographies.  For example, we can take an illustration of a company operating in various international markets, as in the picture below.

In the diagram, I combined different elements.  As an aside, I can guarantee readers that people at Crescendo make much better graphs than mine.  Anyway….

The size of the circle is proportional to the size of the market (except the pink circle for the total global market is just a dot). So USA market is the largest.  The arrows show the market share evolution from the year prior.  In this fictional example, I would be very happy to be with this company.  It has enormous potential.  It is growing market share by winning more in share of wallet everywhere, especially in the largest markets.

In summary – with a side point on the power of graphs – accurate analytics can generate insight.  A lot of people say this: but how many have accurately tried to measure their coverage and winning ratio?