Free market capitalism is an economic system that can generate great wealth and prosperity for nations and their citizens. It is also a system defined by competition that creates winners and losers. While this competitive process can lead to innovation and invention, it can also deteriorate the market share of existing companies, with the worst case leading to bankruptcy.
What can a company do if its market share has been eroded to competitors? There are three key strategies that companies often use to regain market share once it has been lost: pricing changes, promotional changes, and product changes. All three strategies have unique benefits and all are risky for different reasons.
- Companies often compete with one another in terms of market share—that is, how big of a slice of a particular market a company's sales represent.
- If market share is lost to a competitor, there are several strategies that companies often use to fight back: lower prices, greater marketing efforts, and innovation.
- The strategies may be successful, but they are not sure-fire by any means.
By dropping prices, companies hope to lure customers away from competitors. The benefit is a higher market share, but it comes at a cost: lower margins per unit.
This strategy is particularly attractive to large companies that have high economies of scale that allow them to operate at either a lower marginal cost than their competitors or that make it possible to operate at a loss if needed. It's risky because, once prices drop, it can be hard to raise them again, unless the company regains enough market share to muscle out its competitors.
Everybody likes a good sale, and being able to entice customers to return through lower prices can be an excellent short-term strategy. But keep in mind that competitors will see this and also lower prices in turn. This benefits consumers but can lead to a race to the bottom for producers.
Promoting the Brand
Another approach is to change its methods of promotion, which can include raising the advertising budget or using the power of branding for the firm. Depending on how well company leaders identify the specific issues that need to be addressed, playing with promotional efforts can be very successful, or often just simply a costly exercise.
For example, national retailer JCPenney notably struggled with rebranding in the 2010 to 2012 period, while competitor Target (TGT) found success in the early 2000s by marketing itself as a "higher-end" discount retailer.
An excellent customer service component of a business can cause customers to stick around even if prices are better elsewhere. It can also cause customers to jump ship to a competitor, even at a premium, if it means better customer service.
Advertising, marketing, and promotion is a tried and true method of regaining market share, but keep in mind that advertising is an on-going process and the competition is spending money on advertising as well.
Updating Product Offerings
Finally, a company can revamp its offerings to better meet customer needs or to provide something new. Apple (AAPL) successfully tried this tactic in 2014 by introducing the iPhone 6, a significantly revamped version of its smartphone. An instant hit, it enabled Apple to take back some of the market share it had lost to Google's (GOOGL) Android. This strategy can be combined with raising prices to introduce another aspect of differentiation or to position the company's offering as a premium product.
Competition—not necessity—is the mother of innovation in the business world. Coming up with new or updated product offerings can work in the short-term, but if a company cannot keep innovating and generating new and novel products that consumers will demand in the future, it will not have a lasting effect.
The Bottom Line
In free-market economies, competition leads to different companies owning a different sized piece of the pie, meaning that all companies will have a different market share of the product or service they sell.
When a company loses its market share to a competitor, there are a few ways that they can try and gain it back. These include lowering their prices, promoting their brand, and updating their product offering. All of these strategies have their pros and cons and none are guaranteed to work, but they will start a company on the right path to becoming more competitive again.