Podcast Ep 83 | Profit vs Market Share

There is a com­mon trap you can fall into when set­ting cor­po­rate strat­e­gy. By focus­ing on build­ing a big­ger busi­ness in order to chase mar­ket share, you may end up with a larg­er busi­ness that actu­al­ly isn’t more prof­itable. In fact, you can chase your­self into the com­mod­i­ty busi­ness, with a larg­er, busier, and effec­tive­ly weak­er business.

It pays off to focus on pro­duc­ing greater prof­it, not mar­ket share. The job of a lead­er­ship team should be to devel­op and exe­cute a strat­e­gy that pro­duces a high­er return on cap­i­tal, and a high­er prof­it than the indus­try average.

This week on the pod­cast, Kevin and Brad talk about the com­pet­i­tive advan­tage of being focused on prof­it instead of mar­ket share.

EPISODE TRAN­SCRIPT

Please note that this episode was tran­scribed using an AI appli­ca­tion and may not be 100% gram­mat­i­cal­ly cor­rect – but it will still allow you to scan the episode for key content.

Brad Giles 00:13

Wel­come to the Growth Whis­per­ers is where every­thing that we talked about is build­ing endur­ing, great com­pa­nies, com­pa­nies that will last, com­pa­nies that will endure. And that will be able to sus­tain the long weath­ered storms that the world seems to always throw at us. Today, I’m joined as always, by my co host, Kevin Lawrence, from Van­cou­ver, Cana­da. G’day Kevin, how are you doing today?

Kevin Lawrence 00:42

Great, Brad. I’m look­ing for­ward to the show, as I always do.

Brad Giles 00:53

And as always, we like to start with a word or a phrase of the day, what might you have for us today?

Kevin Lawrence 01:00

Mine is refreshed. Just because I’ve been you know, tak­en tak­ing the advice from my book, Your Oxy­gen Mask First. And, and hav­ing some recov­ery time over the last cou­ple of weeks and just came back from a week­end at the spa, is a spa resort near us here up in the Okana­gan, a place called sparkling hills. So had a cou­ple of days there just to recov­er and relax and hang out in the pools and, and just yeah, lots of great time in nature and relax­ing, which is good, feel ener­gized and get­ting excit­ed about tak­ing on some new projects. How are you?

Brad Giles 01:37

Prob­a­bly the oppo­site of that mine is prof­it per X. And real­ly just con­tem­plat­ing how over the years, like 1020 years, prof­it per x as a sim­ple cen­tral con­cept that we work with. So often we clients has evolved. And, you know, the more that we under­stand that deep­er Our under­stand­ing is the more nuances kind of uncov­ered them­selves. So the first time that you or I might have read about prof­it per X could have been in the 90s or the ear­ly 2000s. And just over that 20 year peri­od, how much depth and nuance has grown into that. So refin­ers refresh,

Kevin Lawrence 02:29

those of you who are lis­ten­ing, no, we don’t plan those the word of the day in advance, it just kind of comes out. So that’s all well freestyle hap­pen to work today.

Brad Giles 02:37

As it is, it is a men­tal note to set you up one day. Yeah, we do words that can’t be doing togeth­er. Yeah. All right. So today, we’re talk­ing about why strat­e­gy should focus on pro­duc­ing more prof­it, not mar­ket share.

Kevin Lawrence 02:58

We can almost call it why mar­ket share should be a dirty word in your boardroom.

Brad Giles 03:04

But it isn’t. But isn’t that what we want to do that we want to grow mar­ket share in our com­pa­ny? What don’t we want to grow? I thought we were called the growth whisperers.

Kevin Lawrence 03:13

Exact­ly. Unfor­tu­nate­ly, when a lot of peo­ple focus on grow­ing mar­ket share, it’s just like less expe­ri­enced CEOs and lead­ers that Chase rev­enue. And there’s a place for mar­ket share. But it’s a very spe­cif­ic place. But at a macro lev­el, chas­ing mar­ket share is nor­mal­ly a fool’s game. Because nor­mal­ly, just like when you chase sales, you make a whole bunch of bad choic­es, because you have such a vol­ume focus, ver­sus a qual­i­ty focus. So almost a quan­ti­ty, obses­sion ver­sus a qual­i­ty obses­sion. And if we know, in doing great busi­ness­es gen­er­al­ly have a lot of qual­i­ty, qual­i­ty of peo­ple qual­i­ty and process and qual­i­ty of their prof­its and cash flow. So I think mar­ket share often is mis­un­der­stood. And I think it’s a dirty word in many cas­es in ama­teurs word. It’s an ama­teur per­spec­tive, because they don’t real­ize the con­flict, the the the cost of chas­ing mar­ket share, in many cas­es, although

Brad Giles 04:23

not all. Yeah, yeah. I mean, the job of the lead­er­ship team is to devel­op a strat­e­gy and exe­cute that strat­e­gy that the­o­ret­i­cal­ly should pro­duce bet­ter returns than the indus­try average.

Kevin Lawrence 04:39

Yes, that shows that they’re smart, enter and they’re run­ning their busi­ness while are plan­ning their busi­ness. Well, yeah, but unfor­tu­nate­ly, some­times peo­ple take con­cepts that would work in a very, very large busi­ness and apply it to a small­er medi­um busi­ness and it does­n’t trans­late again. It depends on the strat­e­gy depends on the indus­try that Dan But the root of it is, you know what, with all of the clients we work with, we want them to build great busi­ness­es. And some­times they get caught up in the large busi­ness focus and want­i­ng to get mas­sive. And I think that being big, is con­sis­tent with being great. But the chal­lenge is being big is just big. Usu­al­ly, there’s the say­ing, you know, the big­ger they are, the hard­er they fall, ie, if you’re not smart in high abil­i­ty, you can build a big, wob­bly business

Brad Giles 05:29

that isn’t prof­itable. That per­fect, that isn’t prof­itable. And if it’s, it’s kind of built with­out a strong foun­da­tion, yes, maybe you acquired 20 peo­ple in the indus­try, and you’ve got great size. But is there any, if we look from the cus­tomer’s per­spec­tive, is there any rea­son apart from your size, why I should come to you and not go to the Nim­ble place up the road, who meets my needs better?

Kevin Lawrence 05:58

Cor­rect. And that’s the idea is, you know, if not, again, now, I’ll make a case against sourc­ing, but there is a point when you could chase mar­ket share, and it could be a bril­liant move. That’s in a very spe­cif­ic niche, that, you know, you have a sus­tain­able com­pet­i­tive advan­tage, and big juicy mar­gins, right? Or, or at least you’re so effi­cient, that you get big prof­itabil­i­ty on the busi­ness that you do sub­stan­tial prof­itabil­i­ty, you know, in per­cent­age terms. And, and there are places like that those are pock­et pools, but gen­er­al­ly peo­ple chase it as a macro strat­e­gy, ver­sus a micro strat­e­gy. So if you find, if you’re in an indus­try that nor­mal­ly runs, you know, 32%, gross mar­gin, and 10%, you know, net income or EBIT­DA, and you find a lit­tle hon­ey hole, where you can get 52% gross mar­gin, and 23% EBI­TA. Go nuts. Chase that as long as you have a sus­tained com­pet­i­tive advan­tage. But most peo­ple just say, well, we got­ta get mar­ket share. And they chase mar­ket share with­out doing the prof­it cal­cu­la­tions, and ensur­ing that they’re going to get to keep the busi­ness because they have some sort of sus­tain­able advantage.

Brad Giles 07:14

Here’s the killer ques­tion. Okay, if you or some­one in your lead­er­ship team says we should acquire or aim to grow more mar­ket share the answer, or the qual­i­fy­ing ques­tion should be how will that help us to improve prof­it per­cent­age or net prof­it? Percentage?

Kevin Lawrence 07:34

Or prof­it per X? Yes, yeah. So if we’re, if we do a water­fall graph of our most prof­itable busi­ness, through to our least prof­itable if it’s relat­ed to our most prof­itable busi­ness, let’s go. But gen­er­al­ly, peo­ple miss ana­lyz­ing the prof­itabil­i­ty of that mar­ket share, they’re gonna chase Yeah. And then they won­der why an enter­prise that’s doing a few 100 mil­lion, and then I’ll use EBI­TA. And just for the exam­ple, yeah, and doing 12% EBI­TA. They won­der why it creeps down to nine over time. When they get up to 300 or 400 mil­lion. They’re doing 9% He was it was because they mis­man­aged the busi­ness. They chased mar­ket share, ie vol­ume, busi­ness, ie, often more com­mod­i­ty, low­er priced busi­ness or low­er prof­itabil­i­ty busi­ness. Because they go ahead, it’s hard. We’re not say­ing this is easy. But gen­er­al­ly, the great­est busi­ness­es are very prof­itable. And they do every­thing in their pow­er, not to take on prof­itable busi­ness. And to make sure that they price dif­fer­ent­ly, so that they can stay prof­itable on all the busi­ness they

Brad Giles 08:45

And if you’ve got a com­peti­tor who’s chas­ing mar­ket share, that’s one of the best com­peti­tors to have. Because you can look and say, who are the best, most prof­itable cus­tomers that we can tar­get and meet their needs bet­ter than they are? Because they only care about mar­ket share, we can take the prof­itable cus­tomers, and that’s why they go from 12 to nine or nine to five or what­ev­er it

Kevin Lawrence 09:11

is, yes, pacif­i­cal­ly chal­lenges and a lot of the cas­es, if you are not real­ly clear on your strat­e­gy, you can get stuck into this mar­ket share mind­set, because you’re not smart, or you don’t have a smart enough strat­e­gy to look at it from a com­pet­i­tive advan­tage point of view. Yeah, and that’s, you know, and gen­er­al­ly so one of our your key points here is that mar­ket share is the path to health. Usu­al­ly com­mod­i­ty health, if you’re not care­ful, it’s a very, again, if you’re a mas­sive scale busi­ness, you could be play­ing a dif­fer­ent game, but for most peo­ple, the une­d­u­cat­ed pur­suit of mar­ket share, if you’re not look­ing into the lens of prof­itabil­i­ty, can be real­ly real­ly dan­ger­ous because next thing you know All your busi­ness is in that same mind­set of chas­ing the mar­ket share, but not get­ting the juicy prof­it. And all it means is you should be hav­ing or maybe not you, some­body needs to go back to the draw­ing board and fig­ure out how do we bet­ter meet our cus­tomers needs and get pre­mi­um pric­ing. Because we have a com­pet­i­tive advan­tage, some­thing mean­ing­ful in a way that the cus­tomer is thrilled that we exist, and, and will­ing to pay for it.

Brad Giles 10:28

Most indus­tries, most prod­ucts pro­duce some­thing rel­a­tive­ly sim­i­lar, a good or a ser­vice at around about the same price. So you have the job of strat­e­gy is to find a unique and valu­able posi­tion that cre­ates more prof­it com­pared to the com­pe­ti­tion. So you can do that only two ways. Either A, you pick out the cus­tomers where you can meet their need bet­ter, and they’re pre­pared to pay more prof­it, because you’re going to meet that need bet­ter. And there­fore you can charge a pre­mi­um for your ser­vice. And that’s what most small to medi­um busi­ness­es with high prof­its are doing. Because they don’t have the economies of scale to do the oth­er way. Which is you can take out some of the things that peo­ple don’t val­ue. And then you can charge less than the indus­try aver­age and still make a sig­nif­i­cant prof­it. And that’s why the tech indus­try has been so very suc­cess­ful because they look at the typ­i­cal busi­ness mod­el and they say, Where’s the fat? Where is the things that we don’t need? Where

Kevin Lawrence 11:36

we cut out a lay­er, a mid­dle­man or mid­dle per­son? Yep, no dis­trib­u­tor lev­el, what­ev­er it is, they cut out some­thing to reduce the costs and reduce the price.

Brad Giles 11:46

Yep, that’s it, and yet still make more prof­it. Yep, they’re cre­at­ing a unique and valu­able posi­tion that’s dif­fer­ent from the competition.

Kevin Lawrence 11:56

Yeah. So again, to kind of where we’re at here is that mar­ket share is a place that if you’re going to chase it, you bet­ter duel eyes wide open and know what the heck you’re doing. And doing more vol­ume of low prof­itable busi­ness, you can take and build a $250 mil­lion busi­ness at 3%. And you’re mak­ing some­thing the doc­tors dol­lars there, there’s more dol­lars than when you’re at 200 mil­lion or 100 mil­lion. That’s also a very hard busi­ness to sus­tain. If the indus­try aver­age prof­itabil­i­ty is in the 8%, or 9%. It’s hard to sus­tain, because you’re not going to have enough cash to put back into the busi­ness, to rein­vest into things like inno­va­tion, or what­ev­er it is that you need to do to stay com­pet­i­tive. So if you’re kind of skim­ming the bot­tom, so again, the root of it is, if you’re chas­ing vol­ume, or when you’re chas­ing vol­ume, you need to be chas­ing the juici­est vol­ume. And the only way you can do that well, is to have a real­ly good strat­e­gy so that your com­pet­i­tive cus­tomers love you, and are hap­py to pay either a pre­mi­um to do busi­ness with you. Or because of your unique approach. You can do it at a low­er price, but also using a low­er cost base to be able to do it. Yeah, so it’s inter­est­ing. You know, one of my clients I worked with in the US had a big focus on this, it was inter­est­ing. We nev­er ever talked to mar­ket share. We did­n’t even talk rev­enue. It was very, like, lit­er­al­ly the com­pa­ny crossed a bil­lion dol­lars in rev­enue. And we almost missed it. You know, it was inter­est­ing num­ber two cross but we nev­er even talked about it ever. We talked about gross mar­gin, and EBIT­DA. And every­thing was gross mar­gin, which is the mon­ey we make, you know, after a trans­ac­tion is done at the trans­ac­tion lev­el, and even what sticks after we apply our over­heads. So we would call and they grew incred­i­bly, because that’s all we were focused on. And the CEO again and again and again was say­ing, Hey, we’ve got to be out there find­ing cre­ative ways to save our clients mon­ey. They were in a busi­ness where they could they did save their clients mon­ey by their offer­ing because they were sort of a out­source solu­tion. Yep. And they were con­stant­ly look­ing at solve a cus­tomer prob­lem, save the mon­ey, and that they could do that in very, very prof­itable ways. But they con­stant­ly were look­ing at prof­itabil­i­ty, gross mar­gin, and prof­itabil­i­ty. And then the vol­ume came, more and more cus­tomers came but nev­er mar­ket­share nev­er revenue.

Brad Giles 14:32

So you’ve just giv­en two sep­a­rate sce­nar­ios. One was a team who’s pro­duc­ing 3%. I don’t want to know what the sec­ond team was pro­duc­ing, but it’s above a lot more, a lot more, a lot more. So let’s look go back to the def­i­n­i­tion I said before the job of the lead­er­ship team is to pro­duce an inac­tive strat­e­gy that you know is the high­est return on invest­ment or cap­i­tal invest­ment. The high­est return on cash invest­ed in the busi­ness that’s pos­si­ble by enact­ing and sor­ry, by devel­op­ing and enact­ing that strat­e­gy. So there­fore, the sec­ond lead­er­ship team were much more suc­cess­ful by virtue than the first, because they’re get­ting a much high­er return.

Kevin Lawrence 15:16

Yes, and because the CEO was very strate­gic, and they were obsessed with cre­at­ing cus­tomer val­ue, and in their mar­ket, because there was the peo­ple they were com­pet­ing against, were estab­lished, big, slow, and expen­sive. They were not small, but small­er, nim­ble, and very cre­ative. And so that they pro­vid­ed a notably bet­ter, they part of an excel­lent solu­tion for their cus­tomers. And it can make spec­tac­u­lar prob­lems. Inter­est­ing­ly, by the way, they could have made much more prof­it. But they did­n’t try and squeeze every­thing out of the orange. They left some there, because they want­ed to grow and con­tin­ue to scale the busi­ness. So they got very, very good returns. But there could have been more, but they because of their growth aspi­ra­tions. They did­n’t want to run the busi­ness too tight. Yeah. Yeah. But they were doing but it was an excel­lent busi­ness. Yeah. Yeah. So at the root of all of this is that, you know, when you’re going into a meet­ing is that it’s in your plan­ning for your next year, it’s to be think­ing about strat­e­gy, dif­fer­en­ti­a­tion and growth through that lens ver­sus mar­ket share, and how do we com­pete with our com­peti­tors? Hand to hand and get­ting, you know, get­ting, get­ting into price wars and sil­ly things like that?

Brad Giles 16:46

Yeah, it’s a nice sim­ple ques­tion to ask the lead­er­ship team is, are they think­ing about 10, fix­ing the rev­enue, or 10, fix­ing the prof­it. So when you think about the future think 10 years away, or 15 years away, or what­ev­er it is, what comes to mind is it the rev­enue num­ber will be much larg­er, or the prof­it num­ber will be much larg­er? Now a nuance to that, as you can put in there, the prof­it per X? Yeah, sub­ject that we’ve dis­cussed pre­vi­ous­ly, or the prof­it per unit, or what­ev­er is the prof­it per x that we use for the busi­ness. But if you think about our prof­it will be 10 times larg­er than it is today, in 10 or 15 years, it gets you to think about a whole range of activ­i­ties that are per­haps not prof­itable, or not ide­al. When you think how are we going to get 10 times the prof­it in 10 years? It’s a whole dif­fer­ent range of activ­i­ties. And that’s what we’re encour­ag­ing peo­ple to focus on today.

Kevin Lawrence 17:53

Yes. So a cou­ple of ques­tions that you sug­gest­ed. Anoth­er cou­ple ques­tions are sort of, in addi­tion to what you sug­gest­ed bread would be is how can we get our cus­tomers glad­ly pay­ing 25%? More? Yeah, pick­ing a num­ber, right? Or how, at the same price, can we deliv­er what we’re doing? At 25%? less cost? Right, and real­ly think­ing about that? What would we need to do? Right? Or What oth­er prob­lems do our cus­tomers have that we could solve? It was zoom­ing up to a high­er lev­el, right? Yeah. And, you know, there’s oth­er strate­gic ques­tions, but real­ly, to open up your mind towards cre­at­ing more val­ue. Anoth­er one is, how can we dou­ble the val­ue we cre­ate for our cus­tomers? You know, how can you look into their sys­tems and their sup­ply chain and what they’re doing, and offer addi­tion­al solu­tions that would help to stream­line that and save them or make them more mon­ey inside their own busi­ness. And now you’re real­ly think­ing strate­gi­cal­ly, and I’ve seen some amaz­ing mod­els of what peo­ple have done, and saw some great stuff that we did in retail, where you put the hat of the cus­tomer being in this case, it was a brand, and what does that brand need? And how can we bet­ter pro­vide that for them. And as a result, com­ing up with dif­fer­ent mod­els and ways to lock up their busi­ness and dri­ve more rev­enue for them. So lots of exam­ples, but we want to give keep our mind on com­pet­i­tive advan­tage solv­ing prob­lems that the cus­tomers are thrilled to pay for in some way. And again, stay­ing out of that darn com­mod­i­ty, hell

Brad Giles 19:45

yeah. And so next week, we’re going to talk about the eight com­mon strat­e­gy mis­takes that peo­ple make. And so that’s, I guess it’s kind of a part two under this one. But yeah, with think­ing this is about avoid­ing com­mod­i­ty health stop­ping think­ing about grow­ing rev­enues. And so we’re real­ly going to talk about the strat­e­gy mis­takes that peo­ple make. But back to this episode. So we need to be think­ing about wid­get growth at the same time. So yes, we Yes. So whilst we’ve real­ly stressed today that we need to grow our prof­its, what we’re try­ing to do is com­pound the prof­it, growth, as well as the unit’s growth or the quan­ti­ty of things that goods or ser­vices that we sell. But not only focus­ing on that sec­ond one, the goods or ser­vices, we’re try­ing to get a com­pound­ing impact there.

Kevin Lawrence 20:48

Yeah, I had a con­ver­sa­tion with the CEO this week, and their prof­it growth has been excel­lent, but their unit growth has not mean­ing that they’re mak­ing more mon­ey off their exist­ing cus­tomers, which is out­stand­ing. Yeah. But at some point, if the growth engine itself in terms of units is not grow­ing, your growth won’t sus­tain, you can only get that extra mar­gin extra prof­it for so long. Until that stops, and then it will be flat. And some­times you can decline. Because the new a new busi­ness engine has stopped, inter­est­ing­ly, what we talked about for the CEO, because they’ve done it lots in the past, but it’s keep­ing the new client, you know, the new local acqui­si­tion fore­front in their report­ing and their goals. Yeah, and this hap­pens to a lot of com­pa­nies, they, even if they’re focused incred­i­bly well on prof­itabil­i­ty, growth and all that good stuff. You still need to man­age the unit growth, and it eas­i­ly fades, because the whole team slips more into account man­age­ment, then, you know, land­ing of new accounts or busi­ness development.

Brad Giles 21:56

That’s so fun­ny. About a year ago, I took a client for I took a call sor­ry, from a CEO. And well, he was a for­mer CEO. Now he was the chair­man of the board or main share­hold­er. And so he was a lit­tle bit beside him­self, because he said, Look, we had, he had stepped out suc­cess­ful­ly, and they decid­ed to appoint the CFO, the Chief Finan­cial Offi­cer into the C roll C E. O roll the to basi­cal­ly run

Kevin Lawrence 22:26

the busi­ness. I’ve been to the end of this movie.

Brad Giles 22:30

Yeah. And he said, That was a cou­ple, two or three years ago, had­n’t spo­ken to this guy in that time. And he said, so it’s great that I’ve stepped out. And he said, It’s a fam­i­ly busi­ness that a fam­i­ly sits back, and they’re lov­ing the fact that the prof­it grew. He said, We’ve nev­er made as much prof­it as we have now.

Kevin Lawrence 22:48

But for how many? How many? For how many months? Yeah,

Brad Giles 22:51

well, it was, well, that prof­it was, I would say, two to three years. He said they were just the dol­lar prof­it has been unbe­liev­able. We could­n’t get our head around, that this busi­ness could make that much prof­it. But he said, there’s been this sense of dread that start­ed to step into the fam­i­ly because the rev­enue has gone back­wards. Sure that yeah, it’s gone back about five to 10% Every year, over the last 10 years. And he said So yeah, we’re mak­ing more prof­it. But as busi­ness peo­ple we know this is this is not a good sto­ry. Like it’s not

Kevin Lawrence 23:32

because you’re you got caught up in opti­miz­ing. It’s a very com­mon sce­nario, stream­lin­ing, opti­miz­ing, cut­ting unnec­es­sary cost, but then you kill the growth engine or you kill the val­ue prop one of the two, what­ev­er, you know, it’s it hap­pens all the time.

Brad Giles 23:46

Yeah, they switch off the strat­e­gy switch. They switch off any and they kill

Kevin Lawrence 23:51

the com­pet­i­tive advan­tage. Yeah. And they just milk it until there’s noth­ing left to milk.

Brad Giles 23:57

Yeah, yeah, it’s the dry cow sce­nario. Awe­some. Yeah, so we need to ensure to cir­cle back we got to make sure that we will plan to grow unit growth, as well as prof­it. But the pri­ma­ry ques­tion, as we said ear­li­er, is, let’s ensure that we’re focus­ing not on grow­ing rev­enue, but instead focus­ing on grow­ing prof­it and then ask­ing the sub­se­quent questions

Kevin Lawrence 24:29

grow­ing the hon­ey holes in mar­ket share, not the macro mar­ket share grow­ing into places that were strongest have a sus­tain­able com­pet­i­tive advan­tage. And then gen­er­al­ly we get paid for that. nev­er mind the fact that we’re build­ing loy­al long term cus­tomer rela­tion­ships ver­sus ones where if we don’t have a great advan­tage, they might eas­i­ly go some­where else. Awe­some. Awe­some. I love this one. And when­ev­er peo­ple start talk­ing about mar­ket share, Brett I get fired up. I’m like, You need to prob­a­bly learn a few things. And be and I And some­times they real­ly do know their stuff. But it says you got to be very smart and sophis­ti­cat­ed if you’re going to start to try and chase mar­ket share. It’s a very very tricky, tricky game. Alright, well thanks for lis­ten­ing this has been the growth whis­pers pod­cast with Brad and I’m Kevin for the video Vision ver­sion then go to youtube​.com and search for the growth whis­pers for Brad evo­lu­tion part​ners​.com​.au And for myself, Lawrence and co​.com Hope you have an amaz­ing week. Stay out of com­mod­i­ty hell and chase the hon­ey holes of com­pet­i­tive advan­tage. Have a great one.