Sunday, 21 August 2011

The Market Share Bug

Ford did it with the Model-T. VW nearly went broke for the same reason. Is Microsoft heading for trouble by listening to their customers too much?

Not so long ago, I recall reading somewhere that Microsoft was not going emulate Apple's iPad design, because they had consulted their business clients and they all wanted something that looked like Windows.

This all reminds me of how VW battled to break away from selling the Beetle (Bug if you're American) for much the same reason. All their customers said they wanted one (or something much like one); as many as 90% could say that and still lead a company to terminal decline.

This picture is a tad complex but captures the basic problem. Let's assume a company launches a new product in a market with an overall growth of 10% per annum, and it consistently scores a 90% retention rate with clients (the red line): that fraction can be relied on to buy it again. Despite this very consistent figure, market share rises very fast at first, peaks, then goes into slow decline. Growth follows an even more spectacular variability, starting at over 40% the first year of production, shooting up to over 80%, then going into steep decline, steadying at around 5%. They key to understanding all this is the yellow curve, the fraction of the market the product doesn't already have that it takes from the competition. This fraction rises very fast until it levels off at 40% (first arrow, a) for a couple of years, then the competition starts retaining its customers a bit better (second arrow, b), and the rate of converting competitors declines for a couple of years to 20%, where it sticks for a while until the competition comes out with a product with significant new appeal (arrow c), and conversion from the competition enters a steady and terminal decline.

This graph doesn't correspond to a real scenario; plugging in actual market share numbers requires access to stats over a long enough time to do this properly. Nonetheless the basic model applies whenever a company hits a point where it has a very loyal client base and new buyers aren't interested.

Through all this, the company has been maintaining 90% of its loyal clients, yet if this trend continues, they will eventually go out of business. This is what happened with the Beetle (and before it, the Model-T). Increasingly, buyers who had not bought one before saw it as outmoded and uninteresting. Asking the existing client base what they wanted would have resulted in a resounding "more of the same".

This is why Microsoft today asking their clients what they want is to risk oblivion. Ford and VW recovered; will they?

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