‘Market-share’ is a very commonly used metric to compare the performance of a company amongst its competitors. Unit-market-share is calculated by finding the number of units sold as a percentage of total sales in units. Revenue market share is more popular and is the revenue of the company as a percentage of total revenue of all the competing companies. It takes into account the unit price of the product.
Profitability (% of revenue) is another measure which indicates the margin made by the company while generating revenue. This measure is also used to compare the financial performance of the company with its competitors. To improve profitability, companies reduce the cost or increase the price of their products and services.
Share of wallet (SOW) is yet another metric used to find the loyalty or affinity of the customer toward a product of the company. It is the percentage (“share”) of a customer’s expenses (“of wallet”) for a product that goes to the firm selling the product. To increase the SoW, companies try to increase the average amount that a customer spends per visit and encouraging more frequent visits.
Process innovations play a vital role in improving the Profitability by reducing wastes, input costs, cycle time and defects. Interestingly, process innovations in Sales, Marketing and Branding result in higher sales thereby improving revenue market share. Process innovations are the lifeline of established companies as they generate more profit/cash. Unfortunately, their contribution is very less in making a company enter into the list of Most Innovative companies.
Product/Service improvements & innovations most often result in higher revenues and market-share by (a) increasing the number of customers (b) increasing the unit price of the product/service (c) increasing the share of wallet
By increasing the unit price of the product without a proportionate increase in cost, the profitability also gets improved through product innovations. There could be an instance of product innovation that would reduce the overall revenues but could improve the profitability. Can you think of an example?
Considering that innovative ideas take a longer time to be known as innovations and generate the effect on revenue and profitability, I suggest that companies should track their ‘Share of future innovations’. This measure will give a good sense of Revenue-market-share and Profitability in the next 1-3 years. A simple way to begin, would be to use the past data to establish share-of-innovations for past 2-3 years along with their impact on market-share and profitability.
Once the Share-of-innovation and the impact on revenue and profitability is established for past few years, managers should estimate this measure for the next 2-3 years. This estimation could be best done during the annual strategic planning discussions where megatrends are discussed, potential innovation opportunities are listed, and choices are made for the innovation projects that managers would like to pursue. This measure would also fuel competitive intelligence process in the organization.
An honest concurrence of share-of-future-innovation is an objective assurance to achieve business performance in future as measured through market-share, profitability and other financial measures. If the estimated ‘Share of future innovations’, is not found good enough to meet the management’s expectations on revenue market share and profitability, managers will have to find a way to improve. The levers to improve the ‘Share of future innovations’ are simple: (i) Improve the quality and quantity of innovation opportunities and if need be re-evaluate the boundaries/constraints imposed on the business (ii) Improve resource planning and take up more innovation projects (iii) Re-evaluate the business model of current and future innovations.
How does one know if the share-of-future-innovations is estimated with best intention using the best available knowledge? The veracity of this measure can be established only in future when we can actually collect the data and check if the steps followed and the assumptions made were accurate. To engage the entire organization wholeheartedly into this new concept, I had proposed to tweak the compensation structure.
‘Share of future innovations’ estimated today can be used to objectively assess the ‘Future Market Share and profitability’
Do you agree? Why not?