Route to a brand's best strategy: new findings challenge the belief that market share alone correlates with profitability. Bain & Company's analysis of 200 brands shows that products at the high end stand to earn considerably more with a smaller share of the overall product category

European Business Forum, Spring, 2005 by Cyrus Jilla, Nicolas Bloch, Vijay Vishwanath

Conventional wisdom holds that market share alone determines profitability for branded consumer products. But that masks the full story. Consider what happened to The Gillette Co. after its main competitor Bic introduced low-cost disposable razors sold by the bag in the mid-1970s. Gillette, the global leader in razors, responded with its own razors in bags.

Yet Gillette's brand managers soon realised that even if they maintained a majority share in a value-oriented category, pre-tax operating profit, or return on sales (ROS) would be restricted to only 5-10 per cent. They looked for another road to profitability. Gillette invested more than $200m in research and development, culminating in the 1989 introduction of its Sensor razor. The Sensor sold at a 25 per cent price premium over its own Atra, which until then had been the highest-priced shaving system on the market and it sold well.

Gillette's innovation convinced consumers to pay a premium for a new set of shaving expectations. Consumers proved willing to spend $3.75 for a shaving system that required 70-cent replacement cartridges, while there was an option elsewhere in the market to settle for 40-cent razors. What's more, 15 per cent of Sensor's new sales came from consumers who had bought competitors' disposable razors. The Sensor and its succeeding products returned the razor to a high-end category.

Gillette had decided that making the entire wet-shaving category more premium was more important than just getting back its market share in a category that was becoming a commodity. The lesson is that market share indeed affects profits but market share alone does not strictly correlate with profitability. When Bain & Co. studied the profitability of brands in more than 200 categories of global consumer goods, we found that market share explains only about half of the differences in brands' profitability.

A brand's profit potential is swayed by both market share and the nature of the category in which the brand competes. In Europe, premium brands are those that command at least a 25 per cent to 30 per cent higher price than value brands or private-label counterparts. Premium categories are those in which more than 60 per cent of the volume sold is premium brands.

These findings hold implications for consumer goods organisations and brand managers. They affect not just individual brand strategy, but also brand portfolio strategy, category management, marketing mix, and organisational and investment issues such as R & D, manufacturing capabilities, and even divestitures and acquisitions.

To begin with, the findings suggest new criteria against which consumer product firms can manage their portfolios. The approach, which we call 'High Road/Low Road', requires asking, first, is the category premium or value? And second, is the brand's market share high or low relative to competitors? For any given brand, there are four possible gradations. Each has its own strategic imperatives and each carries a range of expected returns that enables companies to calibrate performance. (See Figure 1: Portfolio Deployment Matrix) This is a useful exercise to truly identify under-performing and outperforming brands.

High road/Low road brand strategies

In shorthand, the varying strategic options for each brand can be expressed as follows:

* High road Protect and grow the high end through innovation after innovation.

* Low road Grow volume relentlessly by focusing on operational efficiencies to reduce costs faster than prices. Only then, with a substantial leadership position, consider moving the category premium.

* Hitchhiker Target niche segments to profit from premium prices set by high road players, but avoid competing on price, which could commoditise the category.

* Dead End Rigorously rethink participation in the category, retreat to a premium niche, or exit entirely.

The shorthand rule for consumer products firms, no matter what quadrant, is that a company must to pay attention to the nature of its category, not just market share. Let's examine how each quadrant works:

High road

As the Gillette example shows, the way to beat back commoditisation is through frequent and meaningful innovation. Gillette has transformed the safety razor into an increasingly high-value device. Its new M3Power not only features battery-powered vibration or 'micro-pulsation' and new edge technology for a closer shave, it dispenses vitamin E and aloe to help heal skin. Since the MP3 launch in 2004, the product has helped Gillette slightly increase its share in the global blade market.

Similarly, Groupe Danone, the French food maker, has continually upgraded its yogurt products' 'premiumness', lifting an entire category in the process. Historically, the majority of its product was plain and fruit-flavored yogurt, simply packaged. Today, that percentage has shrunk dramatically, market by market. In the US, for example, simple yogurts have dropped from 80 per cent of the firm's output to less than 5 per cent. In the interim, Danone has introduced a host of new yogurt products, including its health-centred Actimel and Activia brands in Europe. In France, the company's share rose from 35 per cent in 1999 to 37 per cent in 2004. meanwhile, the volume of premium product in the French category rose from 52 per cent to 72 per cent and the average price premium moved up from 37 per cent to 68 per cent. But the Danone and Gillette experience also underscores another hard and fast rule: taking a value category to the high road is only possible if you're already a clear leader in the category.