by Donald V. Potter

“Market hostility” suggests turmoil. Competition is keen, customers are exerting their power, and prices are falling. But in one crucial respect, hostile markets are actually more stable than non-hostile markets. During market hostility, share shift slows.

Non-hostile markets are usually growing. Market growth means that competing suppliers can grow, sometimes at acceptable rates, even without taking share from other suppliers. Once a market turns hostile, though, growth slows or stops. Now a supplier can attain sufficient volume to prosper only if it can hold onto its own share while also taking share from competitors. Building volume means taking advantage of customer volatility.

What Drives Customer Volatility?

“Two drivers of volatility largely disappear.”

Customers are volatile when they change their pattern of purchases either to buy from a new supplier or to allocate more volume to one of their current suppliers.

In a representative non-hostile market, about 12% of market volume might shift each year. Part of the shift can be attributed to each of the four factors in the customer buying hierarchy:

  • Product Features attract new customer volume as long as they remain unique-which may be quite a while because competitors cannot, or are not highly motivated to, replicate them. Features may account for two percentage points of the share shift.
  • Reliability and Convenience are crucial because a product that performs well and is easy to purchase is always attractive. These factors account for roughly five percentage points.
  • Price moves share because changing suppliers is the only option available to customers who want to change their cost levels. In a non-hostile market, suppliers price within a narrow band to all their customers, but price differences among suppliers can be significant. Price moves about five percentage points.

When hostility sets in, however, features and price are taken out of the equation. Suppliers may stop offering features of marginal value in order to reduce their costs, but they will immediately duplicate any important features that their competitors offer. Just as quickly, they will match competitors’ price moves. Soon all suppliers are offering virtually identical products at similar prices. Two drivers of volatility, accounting for 7% of the annual 12% change, largely disappear. Now share shifts primarily on the basis of reliability and convenience, which are much harder to duplicate, and volatility drops to about five percentage points per year.

Taking Share Gets Tougher

“Most volatility takes place among current suppliers.”

Not only is the level of volatility reduced, but the level of competition is increased. As hostility continues, weak competitors-those with a fragile hold on customers’ attention, limited resources, or a propensity to make mistakes-will disappear or be acquired. Fewer competitors will remain, but they will be tougher.

And, as customers learn to exert their power, they have less reason to change suppliers. Why change when current suppliers are all but obligated to match whatever would-be suppliers can offer? Before hostility begins, the majority of customers can be won away by an attractive offer; once hostility takes hold, most share can be gained only when an incumbent supplier fails its customers by falling behind in the general movement toward better service at ever-lower prices.

Furthermore, volatility takes place primarily among a customer’s current suppliers: when the primary supplier fails, the secondary supplier is ready to step in, and so forth. In a hostile market, a customer has less need to look outside its current relationships. New suppliers have a much smaller chance to break into existing relationships.

Who Gains Share? Who Loses?

In a non-hostile market, small competitors can gain share by keeping their prices low and by offering unique product features. Market leaders cannot possibly match the plethora of new product introductions-not without incurring much higher costs, which would require them to raise their prices. Raising their prices would fatten industry-wide margins, giving the aggressive smaller competitors even more financial fuel with which to attack.

In a hostile market, though, market leaders have advantages. They usually have room to cut costs; in contrast, smaller players must often cut costs so deeply that product and service quality suffer and customers notice. The smaller players can succeed only with new competitive formulas. And, market leaders are already established as the primary or secondary suppliers in many high-volume customer relationships. Once hostility begins, the supplier who is already inside the relationship and known to the customer is positioned to pick up any share lost when another incumbent supplier stumbles.

Closing Thought

The leader’s natural advantage is not a guarantee. Market leaders sometimes believe that their prominence gives them the privilege of not matching competitors on product features, customer service or price. By falling into this Leader’s Trap, they can squander their advantage.

(Note: This Perspective was written in the context of the economy in 1995. While some of the companies may have changed their policies or indeed no longer exist, the patterns they exhibit still hold today.)

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