This is the second in a series of posts exploring business metrics and their usefulness in the engineering software space. This article focuses on two types of external metrics companies can use to measure their market success: market share and category penetration. In many ways, external data is the easiest to obtain but also the least meaningful in running a business since overall market dynamics are out of the control of the typical business. Future pieces will cover internal metrics such as the cost of acquiring a customer measured agains the lifetime value of that same account, and on the complexities of gathering and maintaining customer and market data.
So, are you #1 or #2?
Years ago, Jack Welch was hired at GE to energize the company, clean up the vast number of brands and boost profitable growth. He famously announced that all of its brands would be #1 or #2 in their respective marketplaces — or would be gone. But how does one measure if a brand meets that goal? And does it really mean anything?
Market analysts (like me) create charts showing which vendor or product has the greatest dollar or unit volume in a particular market and time period. But these charts have several problems: they are based on historical information provided by vendors, offer no ‘color’ as to why a column is as tall as it is, and the data underlying the charts may have been manipulated to get a desired outcome. A typical example of that sort of manipulation: “We sell product A into market segment B but showing it that way would make us a tiny player in B, so better leave it in our bigger segment, C.” Or a market segment may be created specifically to highlight a particular vendor or product: Schnitger Corporation is the #1 engineering software industry analyst firm in Andover, MA — but is it at all meaningful to be #1 in a pond we define in any way we choose? If IDC moves to Andover, we will no longer be #1 — not because of any actual change in our business or ability to serve customers, but because a much larger company moved to town.
These charts do serve a purpose, however. Most consumers of this information understand their limitations don’t really look at the numbers in any real detail. They examine trajectories, compare individual vendors to overall market growth rates and pay close attention to timelines.
Growing or shrinking?
Trajectories are the first or second derivative (for the mathematically inclined) of pure market data. They examine change over time and if that chance is accelerating. Say that Company X has 25% of a market that is growing at 7% in year one and 23% of a market that is growing at 9% in year two. Is that good or bad? Are they losing share, as the numbers would indicate? To whom are they losing and is that significant? Or is it more important to know that the company is holding steady in overall dollar terms? To many, this type of analysis is far more useful than a pure “market leader” designation, since it indicates strength or weakness.
Comparing a particular vendor to market growth rates shows many different things. If they are growing more quickly than a market, why? Are they taking share from competitors, growing the customer base into areas not counted by the person who defined the market, changing their distribution methods, undercutting traditional pricing to create growth without profitability? If the share is shrinking, why? Has a competitor released a new product to attract interest that can be regained once the release cycles catch up?
Finally, timeline is key. Who released what products when? How did that affect sales and revenue recognition? (As we saw in the AspenTech results a few weeks ago, unfortunate timing can lead to dismal earnings reports.) Is there a lag in release cycles that is not captured in the data?
How many hands use CAD?
One interesting outgrowth of market size and share is category penetration. “Of all people with hands, how many own gloves?” is actually pretty easy to answer, or so I’m told. “Of all designers, how many have access to a CAD package?” is surprisingly difficult. Here the category, or specific group of customers, is designers — but are engineers, designers? What kind of designers (mechanical, electrical, aerospace, architectural, interior …)? How about students? People working on funded research at universities? Once the category is defined, “penetration” refers to how many within the category have been reached by any of a product type and then by a specific brand of that product type.
Category penetration is a way of examining a very specific set of consumers and trying to determine how they view a particular brand or vendor. It’s a useful way of getting down to the market segments that actually accounts for the vast majority of a company’s revenue and therefore should get the bulk of their attention.
Market share or profitability? Both?
GE used its “#1 or #2” program to motivate employees, change business processes and fine-tune its operating units. But as the owner of a much less complicated business, I find it more useful to focus on profitability, growth, attracting new customers and keeping current customers happy than on being #1. I can’t control if I am #1; as professional athletes are so fond of saying, “all I can do is run my best race.” Internally-focused data is a much better measure of business performance and can yield insights that can be used to help a business thrive.
In the third post in this series we’ll look at the cost of acquiring and keeping customers. In too many cases, this is higher than expected and may even exceed the revenue obtained from the customer, killing any profit expectation. A concept gaining acceptance is “customer lifetime value”; we’ll explore how this ties into acquisition cost.
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